Question

What shifts the short run aggregate supply curve?

What is the shape of the long run aggregate supply curve and why is it that way?

What does potential output mean and what is happening when the economy is at potential output?

Answer 1

1)The short-run aggregate supply shifts in relation to changes in price level and production. any factor that affects the production cost like taxes and subsides, price of labor (wages), and the price of raw materials can change the production cost and there by has the capacity to shift the shortrun aggregte supply curve to the left or the right.

2) the shape of the longrun aggregate supply curve is vertical at the full employment level of output and it is so because in the long run all the factors are fully employed and there is no scope for further increase in output so at that level it becomes vertical.

3)potential output means the highest level of production that can be sustained over the longrun. when the economy is at the potential output the aggregate supply curve becomes vertical and there is no scope for  further increase in production and output so if demand increase in the economy then only the price level will increase.