What is the economic reason why the SRAS curve slopes up
The correct answer and explanation is:
The short-run aggregate supply (SRAS) curve slopes upward because, in the short run, an increase in the price level leads to a greater quantity of goods and services supplied. This relationship is driven by the following economic reasoning:
When the overall price level rises, businesses can increase their production and supply more goods and services. This is because higher prices generally mean higher revenue for firms, which increases their profitability. In the short run, firms may have some flexibility to adjust output by utilizing existing capital and labor more intensively. As firms face higher prices for their output, they are incentivized to increase production, even though some input costs (such as wages and raw materials) may also rise, though not as quickly as the output price. This results in a positive relationship between the price level and the quantity of output supplied, leading to the upward slope of the SRAS curve.
Additionally, the SRAS curve’s upward slope can be attributed to the concept of “sticky wages” and “sticky prices.” In the short run, wages and some prices do not adjust immediately to changes in the price level due to contracts, negotiation cycles, and other frictions. This means that when prices rise, businesses may not immediately face proportional increases in input costs, such as wages or raw materials. Consequently, firms are able to hire more workers and utilize their existing resources more efficiently, leading to increased production. As a result, the economy responds to higher prices by increasing output, which is captured by the upward slope of the SRAS curve.
However, this relationship holds in the short run. In the long run, the aggregate supply curve is vertical because factors like wages and prices adjust fully to changes in the price level, removing the incentive for firms to increase output.