The aggregate supply curve tells us the amount of output producers are willing to supply at given levels of inflation.
a. The short-run aggregate supply curve slopes up because, in the short run, costs of production adjust more slowly than output prices.
b. Production cost changes shift the short-run aggregate supply curve. These occur when:
i. Expectations about future inflation change.
ii. Raw material prices, such as the cost of energy, change.
c. The long-run aggregate supply curve is vertical at potential output.
i. Along the long-run aggregate supply curve, expected inflation equals current inflation.
ii. The long-run aggregate supply curve shifts when either the amounts of capital and labor used in the economy change or productivity changes.
iii. The short-run aggregate supply curve intersects the long-run aggregate supply curve at the point where inflation equals expected inflation.