Short-Run Aggregate Supply Curve
The short-run aggregate supply curve shows the quantity of goods and services that firms are willing to produce at each price level in the short run. In other words, it represents the relationship between the quantity of goods and services supplied and the price level. Unlike the aggregate demand curve, which always has a downward slope, the slope of the aggregate supply curve depends on the time horizon.
Graph of the Short-Run Aggregate Supply Curve
In the short run, the aggregate supply curve has a positive slope, which indicates that a change in the overall price level in the short run affects aggregate supply. Since the slope is positive, the relationship between the price level and aggregate supply is also positive; an increase in the price level leads to an increase in aggregate supply, while a decrease in the price level results in a decrease in aggregate supply. In the graph, when the price level decreases from P1 to P2, in the short run, aggregate supply increases from Y1 to Y2.
The fact that the aggregate supply curve has a positive slope means that the overall price level affects the supply of aggregate output. The influence of a nominal variable (the price level) on a real variable (the quantity of output supplied) is one of the main differences between the short run and the long run. In the long run, it is assumed that nominal variables do not affect real variables. This is why short-run and long-run aggregate supply curves are differentiated: the short-run curve illustrates that the price level affects aggregate supply, thus having a positive slope, while the long-run curve, in contrast, illustrates that the price level does not affect aggregate supply and is therefore vertical.