Question

A simple model of a firm describes it as an entity that buys – (for example, labor) and sells – (goods and services). A firm’s input prices, which affect costs, are generally – in the short run, while a firm’s output prices, which affect revenue, are –. Therefore, an increase in the short-run price level raises revenue – than costs, so firms produce more in the short run. Consequently, the SRAS curve slopes upward.

Answer 1

Answer:

A simple model of a firm describes it as an entity that buys production factors – (for example, labor) and sells its output (goods and services). A firm’s input prices, which affect costs, are generally fixed in the short run (like wages, that are established by contract and must be respected during the period they were stablished), while a firm’s output prices, which affect revenue, are  adjustable (they do not depend on a contract). Therefore, an increase in the short-run price level raises revenue more than costs, so firms produce more in the short run. Consequently, the SRAS curve slopes upward.

In the long run, however, firm’s input prices are variable, and they will adjust together with the firm’s output prices, making LRAS perfectly inelastic in the potential level of production.