Aggregate Supply Curve

A curve that shows the quantity of goods and services that firms choose to produce and sell at different price levels.

(Peter Dungan, Toronto  PPG1002)

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The long run aggregate supply curve is vertical on a price-output graph. The long run aggregate supply curve is vertical because of the classical dichotomy, which states that real output should not be affected by prices.

In the short run, however, the aggregate supply curve slopes upward and to the right. The aggregate supply curve is upward sloping in the short run largely because the prices of some goods are “sticky” and cannot be easily changed over time. Perhaps most importantly, the price of labour is particularly “sticky”. Wages adjust slowly due to long-term contracts and negotiation lags. This inability to rapidly change wages in response to changes in the general price level contributes to the slope of the short run aggregate demand curve.