What is the difference between the short-run and long-run aggregate supply curves?

The distinction between the short-run and long-run aggregate supply curves is fundamental in macroeconomic theory. In the short run, the aggregate supply curve is upward sloping, indicating that with higher price levels, firms are willing to produce more goods and services. This relationship exists because, in the short run, some factors of production are fixed, leading to increased margins and profits for suppliers when prices rise. As businesses increase output to meet higher demand, they typically face increasing costs due to the limitations of their fixed inputs.

Conversely, the long-run aggregate supply curve is vertical. This reflects the economy's capacity to produce goods and services when all factors of production are variable and fully employed. In the long run, the production capacity is not influenced by the price level, as the economy adjusts to return to full employment. This indicates that any change in aggregate demand will only affect prices, not the real output level.

Understanding the nature of both curves is crucial in analyzing economic policies and predicting the response of the economy to changes in demand or supply conditions. The long-run perspective allows economists to assess the potential for economic growth and structural changes, which cannot be fully captured by short-run analyses.