Why does the short-run aggregate supply curve have a positive slope?

Why does the short-run aggregate supply curve have a positive slope?

• A. Because wages are perfectly flexible in the short run.
• B. Because the price level does not affect profits.
• C. Because a higher price level raises profits when some production costs are fixed.
• D. Because the overall price level determines potential output.

Answer: (C)

In the short run, some production costs are fixed while the price of the final good can rise. When the price level goes up, revenue per unit increases but many costs stay the same, so profit per unit rises. That makes producing and selling more output more attractive, prompting firms to increase quantity supplied. This combination of higher prices boosting profits while some costs are fixed is why the short-run aggregate supply curve slopes upward. If wages and other costs were perfectly flexible in the short run, input costs would rise as prices rise in a way that could keep profits from expanding, which would weaken or remove the upward slope. Saying the price level doesn’t affect profits conflicts with the idea that higher prices can boost profits when some costs are fixed. Finally, potential output is about the economy’s long-run capacity, determined by resources and technology, not the current price level, so that choice doesn’t explain the short-run slope.

In the short run, some production costs are fixed while the price of the final good can rise. When the price level goes up, revenue per unit increases but many costs stay the same, so profit per unit rises. That makes producing and selling more output more attractive, prompting firms to increase quantity supplied. This combination of higher prices boosting profits while some costs are fixed is why the short-run aggregate supply curve slopes upward.

If wages and other costs were perfectly flexible in the short run, input costs would rise as prices rise in a way that could keep profits from expanding, which would weaken or remove the upward slope. Saying the price level doesn’t affect profits conflicts with the idea that higher prices can boost profits when some costs are fixed. Finally, potential output is about the economy’s long-run capacity, determined by resources and technology, not the current price level, so that choice doesn’t explain the short-run slope.