AP Syllabus focus: ‘The SRAS curve slopes upward in the short run because wages and some prices are sticky.’
Short-run aggregate supply (SRAS) slopes upward because many production costs do not adjust immediately when the price level changes.
With sticky wages and sticky input prices, firms’ profits and hiring incentives change as prices move.
The mechanism behind an upward-sloping SRAS
In the short run, a rise in the price level can occur faster than many firms’ costs. When a firm can sell output at higher prices while key costs lag behind, producing additional output becomes more profitable, so real GDP supplied increases.
Sticky wages: why labour costs lag behind prices
Sticky wages: Nominal wages that adjust slowly to changes in economic conditions because of contracts, bargaining, and institutional constraints.
Many workers are paid according to nominal (money) wage contracts set for months or years.
This two-panel figure shows how a leftward shift in demand creates excess supply when nominal wages (in the labor market) or posted prices (in the goods market) do not adjust immediately. The left panel highlights sticky wages at , where the quantity of labor supplied exceeds the quantity of labor demanded, generating unemployment; the right panel parallels the same logic for sticky product prices at . Source
If the overall price level rises before wages are renegotiated, firms’ wage cost per worker does not rise immediately, encouraging firms to employ more labour and expand output.
A helpful way to express this is with the real wage, which compares wages to the price level.
= nominal wage rate, dollars per hour
= price level (index)
When rises and is fixed in the short run, the real wage falls. A lower real wage makes labour cheaper in real terms, so firms tend to:
increase quantity of labour demanded
raise output supplied as production becomes more profitable
Common reasons nominal wages are sticky include:
Long-term labour contracts (wages set in advance)
Minimum wage laws and wage norms
Bargaining and adjustment costs (time and effort needed to renegotiate)
Efficiency wage practices (firms resist cutting or rapidly changing wages)
Sticky prices and other input costs: why non-labour costs also lag
Even if some product prices change, many input costs adjust with delays. Examples include:
multi-month supply agreements for materials and components
pre-set service contracts (maintenance, shipping, business services)
slow-to-update posted prices in some markets
When the price level rises broadly but some costs remain temporarily fixed, firms’ per-unit profitability increases, supporting greater production in the short run.
How to read the SRAS curve (movement along the curve)
The upward slope describes a movement along SRAS caused by a change in the price level, holding short-run input costs and contracts fixed. As the price level rises:
firms expand production
real GDP supplied increases in the short run
If wages and all input prices adjusted instantly to the price level, firms would not experience this temporary profitability change, and the short-run relationship between the price level and output supplied would be much weaker.
FAQ
A steeper SRAS generally reflects less responsiveness of output to price-level changes.
This can occur when wages and key input costs adjust more quickly (less stickiness), so profitability changes less when $P$ changes.
COLAs partially index nominal wages to inflation, reducing the fall in real wages when $P$ rises.
With stronger indexation, firms’ costs rise sooner, so output responds less to price-level increases, making SRAS less upward-sloping.
Wages can be downwardly rigid due to:
morale and retention concerns
implicit contracts and norms
minimum wage and bargaining constraints
This asymmetry can make output adjustments more likely than wage cuts when conditions change.
Industries with posted prices, regulation, or infrequent repricing (e.g., some services) may adjust prices slowly.
Greater price stickiness can strengthen the short-run link between $P$ changes and output supplied.
Key factors include contract length, union coverage, frequency of wage bargaining, and the prevalence of indexation clauses.
Shorter contracts and more flexible wage-setting reduce stickiness, weakening the SRAS response to changes in $P$.
Practice Questions
(3 marks) Explain why the SRAS curve slopes upward in the short run.
Identifies sticky wages and/or sticky prices as the key reason (1)
Explains that when the price level rises while some costs are fixed, real production costs fall / profitability rises (1)
Links higher profitability to higher real output supplied in the short run (1)
(6 marks) The price level increases unexpectedly while nominal wages are fixed by contract. Using this information, explain the short-run effect on (i) the real wage, (ii) firms’ labour demand, and (iii) real output supplied.
States the real wage is (1)
Explains that with up and fixed, the real wage falls (1)
Explains lower real wage makes labour cheaper in real terms (1)
States firms increase quantity of labour demanded (1)
Links higher employment to higher output/real GDP supplied (1)
Clearly ties the chain to the upward-sloping SRAS (movement along SRAS) (1)
