Question

What are the 3 reasons Short-run Aggregate Supply is upward sloping? Explain in your own words.

Answer 1

Aggregate supply is the sum total of all final goods and services produced in a country in an accounting year.The AS curve shows the total output which the producers are willing to produce and are able to supply /sell at different price levels in the market.If more output is produced,more people would be employed and they would be paid more.This would generate income for them,thus from the income point of view,it is the total income generated in a financial year in a country.The 3 reasons for its upward sloping in the short run can be explained as follows:-

• The AS curve is upward sloping due to the positive relationship between the price and the output.In other words,the output increases as the prices rise and vice versa.It is so because at higher prices the producers get more money for producing each unit of any produce.This increases their profit margins encouraging them to produce more.
• The AS curve is drawn upward sloping at 45 degrees as this AS line is equidistant from both the axis.This implies that Aggregate Income and employment and Aggregate Supply of output move in the same direction and same proportion.
• The AS curve ultimately depends upon the physical and technical conditions of production which includes factors such as capital stock,technology,nature of production function etc.In the short run these factors remain constant.Thus,output can only be increased by employing more and more labours.When output is increased and more labours are employed it leads to rise in the cost of production as labourers has to be paid wages.At the same time producers or entrwepreneurs need to ensure their normal profit or minimum revenue to stay in the process,so they must expect to receive greater so as to cover increased costs incurred,which can only be done when prices are higher.Thus the AS curve slopes upwards to the right.