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. LRAS b. ISRAS c. SRAS d. ISRAS e. SRAS f. ISRAS

Step-by-step solution

Identifying Vertical Line

A vertical line in the context of aggregate supply curves represents the long-run aggregate supply curve (LRAS). In the long run, output is determined by the economy's resources and technology, and it is not influenced by the price level.

Fixed Price Level

When the price level is fixed, it refers to the immediate-short-run aggregate supply curve (ISRAS). In this scenario, both output and input prices are fixed which results in a horizontal supply curve.

Flexible Output Prices with Fixed Input Prices

An upsloping supply curve that reflects flexible output prices but fixed input prices corresponds to the short-run aggregate supply curve (SRAS). This curve slopes upwards because as the price level increases, firms are willing to supply more, but input prices don't change immediately.

Identifying Horizontal Line

A horizontal line represents the immediate-short-run aggregate supply curve (ISRAS) where the price level is fixed, indicating that firms will supply the same amount of goods regardless of price changes.

Determining Upsloping Curve

An upsloping curve is a characteristic of the short-run aggregate supply curve (SRAS). This reflects the fact that in the short run, firms tend to increase production as the price level rises to maximize their profits with relatively constant inputs costs.

Output is Fixed

When output is fixed, it signifies the immediate-short-run aggregate supply curve (ISRAS), where neither input nor output prices can change swiftly, resulting in a horizontal line.

Key concepts

immediate-short-run aggregate supply curve

The immediate-short-run aggregate supply curve (ISRAS) is a fundamental concept when examining how an economy reacts in the very short term. It is depicted as a horizontal line, indicating that the overall price level remains constant regardless of changes in demand. This is because both output prices and input prices are fixed in the immediate short run.

In practical terms, this means that businesses cannot adjust their prices quickly enough in response to fluctuations in demand. As a result, the quantity of goods and services supplied remains unchanged even if consumer demand surges or falls.

• **Fixed prices:** Both input and output prices don’t change rapidly, ensuring that the curve remains horizontal.
• **Output levels:** Firms keep producing at a pre-determined capacity, as price levels remain stable.

The application of the ISRAS is crucial in understanding how economies with rigid price structures respond to economic shocks, making it a vital part of economic theory and policy planning.

short-run aggregate supply curve

The short-run aggregate supply curve (SRAS), unlike the immediate-short-run, is upsloping. This means it depicts a scenario where the overall price level affects the quantity of goods and services firms are willing to supply.

In the short run, while output prices can adjust, input prices remain sticky. Thus, as the price level rises, firms find it profitable to increase production as the cost of production in terms of input prices does not rise immediately.

• **Upsloping nature:** The curve slopes upwards as firms respond to higher output prices by increasing supply.
• **Profit motives:** With fixed input prices, profit margins improve as product prices increase.
• **Time lag in input adjustments:** The distinction from the immediate-short-run lies in the flexibility of output prices over input prices.

The SRAS is crucial for analyzing how short-term policies and demand changes impact production and price levels in an economy. It enables economists to predict firm behaviors and guide economic policy accordingly.

long-run aggregate supply curve

The long-run aggregate supply curve (LRAS) is a key economic concept that focuses on an economy's capacity to produce goods and services when all resources can fully adjust, given constant technology and resource availability.

Represented as a vertical line, the LRAS signifies that in the long run, actual output is independent of the price level. The economy's production capabilities are determined by available technology, resources, and institutional structures.

• **Vertical nature:** Indicates that production is ultimately limited by real factors, not price levels.
• **Full employment:** Assumes that resources are fully utilized.
• **Flexible input prices:** Unlike the short-run, all prices, including input prices, are flexible.

Understanding the LRAS helps policymakers focus on factors such as technological advancement and workforce enhancements to boost long-term economic growth, rather than relying solely on short-term demand management. It emphasizes sustainable economic growth through capacity expansion.