The supply curve is one of the core concepts in the study of economics. It essentially explains the relationship between quantity supplied by a firm, and at what price. Short-run aggregate supply describes this relationship on the economy as a whole, and is thus a common concept in macroeconomics. Short-run aggregate supply is backed by two models: the sticky-wage model and the sticky-price model.
Short-run aggregate supply, often abbreviated as SRAS, represents the relationship between the quantity of a product produced and the price to produce it. It is often shown alongside the aggregate demand curve when demonstrating equilibrium levels of price and quantity. The supply curve is aggregate in that it shows the price and quantity relationship of all producers in the economy. The short-run aggregate supply curve also differs from the long-run aggregate supply curve in that in the short run, supply is dictated by both price and production levels, whereas in the long run, it is determined only by the factors of production with the price as given.
When viewed graphically, with price on the y-axis and quantity on the x-axis, the short-run aggregate supply curve slopes upward, with the slope of the curve increasing further with price. This differs from the long-run aggregate supply curve, which is simply a straight and vertical line. The reason the curve is upward sloping may be explained by a variety of models; however, the two most common are the sticky-wage and sticky-price models.
The Sticky-Wage Model
Sticky wages mean that wages do not fluctuate greatly with time, as workers tend be paid on a pre-agreed, contractual basis. It takes time for a worker to change his or her wage due to worker misconception of prices in the economy. When prices rise, real wages fall. Real wages, as opposed to nominal wages, can be defined, essentially, as purchasing power. When these real wages fall, it is cheaper for a firm to hire more employees to produce more output.
The Sticky-Prices Model
Sticky prices mean that prices are not immediately changed due to any external reasons. This is due to imperfect information; that is, firms do not always have the best information about the economy immediately. So, when a firm expects higher prices of inputs, they set their own prices high. Other firms do this to capitalize on the first firm's perception of input prices. The higher output price gives an incentive to a firm to increase production, as profits will be higher. Demand increases with higher levels of production, which in turn causes sticky prices to increase. This process continues, resulting in an upward-sloping supply curve.
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