Question

Label each of the following descriptions as being either an immediate-short- run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. a. A vertical line. b. The price level is fixed. c. Output prices are flexible, but input prices are fixed. d. A horizontal line. e. An upsloping curve. f. Output is fixed.

Short answer

a. Long-run, b. Immediate-short-run, c. Short-run, d. Immediate-short-run, e. Short-run, f. Immediate-short-run.

Step-by-step solution

Understanding the Immediate-Short-Run Aggregate Supply Curve

In the immediate-short-run aggregate supply curve, the price level is fixed, which means that both input and output prices are fixed. Therefore, regardless of the demand level, producers cannot change their prices and must produce at the output level corresponding to the fixed prices. This leads to a horizontal line on the graph. a. Not immediate-short-run, b. Immediate-short-run, c. Not immediate-short-run, d. Immediate-short-run, e. Not immediate-short-run, f. Immediate-short-run.

Understanding the Short-Run Aggregate Supply Curve

In the short-run aggregate supply curve, output prices are flexible but input prices are fixed. This means that businesses can change the prices of their finished products to meet demand fluctuations, but the cost of inputs remains constant. This results in an upward-sloping curve on the graph. a. Not short-run, b. Not short-run, c. Short-run, d. Not short-run, e. Short-run, f. Not short-run.

Understanding the Long-Run Aggregate Supply Curve

In the long-run aggregate supply curve, both input and output prices are fully flexible. This results in an economy operating at full capacity or potential output, leading to a vertical line on the graph. In this situation, fluctuations in demand do not affect the overall level of output. a. Long-run, b. Not long-run, c. Not long-run, d. Not long-run, e. Not long-run, f. Not long-run.

Key concepts

Immediate-Short-Run

In the immediate-short-run, the aggregate supply curve's main characteristic is that the price level remains constant. This situation can be likened to having a price freeze, where prices for goods and services, as well as input prices like wages and raw materials, cannot change.
As a result, producers are stuck with a specific level of output, irrespective of changes in demand. Imagine trying to sell lemonade at a fixed price per cup, no matter how large the crowd is at your stand. Because prices don't vary, this scenario is represented as a horizontal line on a graph.
This horizontal line emphasizes that neither output nor prices can adjust in response to economic events in the immediate-short-run.

• The price level is fixed.
• Both input and output prices cannot change.
• Producers cannot adjust their production levels based on demand.
• Graphically displayed as a horizontal line.

Short-Run

In the short-run, the aggregate supply curve depicts a scenario where firms have some flexibility. Output prices are flexible, allowing businesses to adjust prices for goods and services in response to demand changes. However, costs for inputs, such as wages or raw materials, remain sticky, or fixed in the short-term.
This flexibility means that when demand increases, businesses can charge higher prices to maximize profits. Conversely, when demand decreases, they might lower prices to attract customers.
Graphically, this is shown by an upsloping curve, reflecting the increasing willingness of businesses to supply more output as the price level rises.

• Output prices can adjust based on demand.
• Input prices remain unchanged in the short-run.
• The graph shows an upward slope.
• Businesses navigate fluctuating demand by adjusting output prices.

Long-Run

The long-run aggregate supply curve presents a situation where time has allowed all prices to become fully flexible. Both input prices and output prices can adjust, meaning no price stickiness remains in the economy.
In the long-run, the economy operates at its full capacity or potential output. This means that even if there's increased demand, output levels remain constant, as firms are using their resources to maximum efficiency.
Graphically, this is depicted as a vertical line, signifying that the level of output is not influenced by the price level in the long-run.

• Both input and output prices are flexible.
• The economy functions at full capacity.
• Graphically represented by a vertical line.
• Demand fluctuations do not affect long-run output levels.