Question

What is the economic reason why the SRAS curve slopes up?

Short answer

The SRAS curve is positively inclined because it is closely tied to price level and also due to other economic factors such as flexible input.

Step-by-step solution

Concept introduction

The SRAS curve depicts the relationship between pricing and aggregate output.

Aggregate supply is the entire amount of aggregate output that enterprises in the economy are willing to create and sell at each potential price level.

Explanation

The increasing slope of SRAS is due to the fact that inputs are flexible such as the employer's ability to transfer from one company to another and firms have to make changes in their production decision. Therefore any change in price will have a direct impact on the manufacturer's decision. A rise in price at the same cost level will motivate the manufacturer to boost production. Similarly, the lower price will discourage producers from producing more because the revenue will be smaller than before, affecting a producer's rational conduct. As a result, the price level is strongly tied to the short-run supply curve. Therefore, the SRAS curve has an increasing slope.