Some Important Provisos About The As Curve

The upward-sloping aggregate supply curve we've presented in this chapter gives a realistic picture of how the economy behaves after a demand shock. In the short run, positive demand shocks that increase output also raise the price level. Negative demand shocks that decrease output generally put downward pressure on prices.

However, the story we have told about what happens as we move along the AS curve is somewhat incomplete.

First, we made the assumption that prices are completely flexible—that they can change freely over short periods of time. In fact, however, some prices take time to adjust, just as wages take time to adjust. Firms print catalogs containing prices that are good for, say, six months. The public utility commission in your state may set the prices of electricity, gas, water, and basic telephone service in advance for a year or more.

Second, we assumed that wages are completely inflexible in the short run. But in some industries, wages respond quickly. For example, in the construction industry, contractors hire workers for projects lasting a few months. When they can't find the workers they want, they immediately offer higher wages—they don't wait a year.

Third, there is more to the process of recovering from a shock than the adjustment of prices and wages. During a recession, many workers lose their jobs at the same time. It takes time for those workers to become re-established in new jobs. As time passes, and job losers become job finders, the economy tends to recover. This process, in addition to the changes in wages and prices we've discussed, is part of the long-run adjustment process and helps to bring the economy back to full employment after a shock.

Using the

Using the

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