Discuss why the short run aggregate supply curve has a positive slope and the long run supply curve

Discuss why the short run aggregate supply curve has a positive slope and the long run supply curve a vertical line.

In the short-run, the aggregate supply curve is upward sloping because some nominal input prices are fixed and as the output rises, more production processes experience bottlenecks. At low levels of demand, production can be increased without diminishing returns and the average price level does not rise. However, when the demand is high, few production processes have unemployed fixed inputs. Any increase in demand and production increases the prices. In the short-run, the general price level, contractual wage rates, and expectations many not fully adjust to the state of the economy. As a result, there is a positive relationship between the price level and the output. The short-run aggregate supply curve is an upward slope. The short-run is when all production occurs in real time.

In the long-run, only capital, labor, and technology impact the aggregate supply curve because at this point everything in the economy is assumed to be used optimally. The long-run supply curve is static and shifts the slowest of all three ranges of the supply curve. The long-run curve is perfectly vertical, which reflects economists’ belief that changes in aggregate demand only temporarily change an economy’s total output. The long-run is a planning and implementation stage.

Short run aggregate supply curve is upward slopping associated to the slow adjustment of money wages. Wages are usually set with long term contracts so wages do not adjust quickly in the short run, they are "sticky". When wages are stuck a rise in price level lowers the real wage making labor cheaper. The lower wage induces firms to hire more cheaper labor and the additional labor hired produces more output. This means that the positive (upward slopping) supply curve during the time of the nominal wage which is lower cannot adjust to the change in the price level.

In the long-run real output is constant at every price level. Technological progress is reflected in right-ward shifts of the long-run aggregate supply curve. Fixed costs give rise to a positively sloped short run aggregate supply curve.