<p>I didn't quite well understood your question, but from what I could make of it I have answered the relation behind the formation of the Short run aggregate supply </p>

<p>In the short run, nominal rigidities , and/or imperfect information, make the AS
curve positively sloped (SRAS - Short run aggregate supply)</p>

<p><a href="https://i.sstatic.net/CzDEE.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/CzDEE.png" alt="enter image description here"></a></p>

<p>The position of the SRAS curve is determined by the factors 
contributing to equilibrium in the labour market. In particular, an increase
in the expected price level makes workers bargain for higher wages (for
any given unemployment rate). The increase in the wage raises the actual
price that firms set. As a result, an increase in the expected price level
causes the AS curve to shift upwards</p>

<p>Diagrammatically , the SRAS curve should shift upwards ; 
<a href="https://i.sstatic.net/ocNcQ.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/ocNcQ.png" alt="enter image description here"></a></p>

<p><a href="https://i.sstatic.net/hVLZE.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/hVLZE.png" alt="enter image description here"></a></p>

<p>This equation states that the deviation of the actual price level from the
expected price level, P – Pe, is proportional to the deviation of output
from its natural level, Y – Yn</p>

<p>If you are confused between Workers negotiation and AS fall or rise - you should read about the WS-PS model. The WS stands for wage setting, PS for price setting.</p>

CC BY-SA 3.0
2016-03-07T19:25:32.480Z
2016-03-09T18:24:45.990Z
2016-03-09T18:24:45.990Z
Kir'Shara
<p>This question is considering an AD-AS model, with Price on the Y-axis and Real GDP on the X axis. The AS is composed of the Keynesian (horizontal), intermediate (upward sloping) and classical (vertical range.</p>

<p>I read that one explanation for the upward slope of the intermediate range is that as price level increases, output prices may increase beyond input price (due to rigidity). Hence, real value of inputs/costs falls, and it becomes more profitable to produce the good, and hence output increases.</p>

<p>Regarding this uneven increase in the nominal value of outputs and inputs, are they both reflected in the y-axis? Meaning, does the y-axis's aggregation of price contain both intermediate as well as final goods, or is it merely an estimation of final goods. I would think that in the former case, the rise in GPL on the graph (inducing increase in real GDP) contains both increases in output and input. In the latter case, the rise in GPL contains only output price increases, but the increase in input prices which lags behind is reflected off the graph.</p>

<p>I would think that in both cases, whether the increase in input prices is reflected on the y axis or not, the shape of the intermediate range still holds. Hence, is may not be significant. Is it simply a choice of what metric (CPI, etc.) I use to estimate price on my y axis?</p>

<macroeconomics><price-level>
Significance of Y-axis in Aggregate Supply curve (AD-AS model)
Calibri
# Significance of Y-axis in Aggregate Supply curve (AD-AS model)

(Asked by: username_0 on 2016-03-07)

This question is considering an AD-AS model, with Price on the Y-axis and Real GDP on the X axis. The AS is composed of the Keynesian (horizontal), intermediate (upward sloping) and classical (vertical range.

I read that one explanation for the upward slope of the intermediate range is that as price level increases, output prices may increase beyond input price (due to rigidity). Hence, real value of inputs/costs falls, and it becomes more profitable to produce the good, and hence output increases.

Regarding this uneven increase in the nominal value of outputs and inputs, are they both reflected in the y-axis? Meaning, does the y-axis's aggregation of price contain both intermediate as well as final goods, or is it merely an estimation of final goods. I would think that in the former case, the rise in GPL on the graph (inducing increase in real GDP) contains both increases in output and input. In the latter case, the rise in GPL contains only output price increases, but the increase in input prices which lags behind is reflected off the graph.

I would think that in both cases, whether the increase in input prices is reflected on the y axis or not, the shape of the intermediate range still holds. Hence, is may not be significant. Is it simply a choice of what metric (CPI, etc.) I use to estimate price on my y axis?

**Tags:** macroeconomics, price-level

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## 1 answers

### Answer by username_1 on 2016-03-07. Score: 1

I didn't quite well understood your question, but from what I could make of it I have answered the relation behind the formation of the Short run aggregate supply

In the short run, nominal rigidities , and/or imperfect information, make the AS
curve positively sloped (SRAS - Short run aggregate supply)

[![enter image description here](https://i.sstatic.net/CzDEE.png)](https://i.sstatic.net/CzDEE.png)

The position of the SRAS curve is determined by the factors
contributing to equilibrium in the labour market. In particular, an increase
in the expected price level makes workers bargain for higher wages (for
any given unemployment rate). The increase in the wage raises the actual
price that firms set. As a result, an increase in the expected price level
causes the AS curve to shift upwards

Diagrammatically , the SRAS curve should shift upwards ;
[![enter image description here](https://i.sstatic.net/ocNcQ.png)](https://i.sstatic.net/ocNcQ.png)

[![enter image description here](https://i.sstatic.net/hVLZE.png)](https://i.sstatic.net/hVLZE.png)

This equation states that the deviation of the actual price level from the
expected price level, P – Pe, is proportional to the deviation of output
from its natural level, Y – Yn

If you are confused between Workers negotiation and AS fall or rise - you should read about the WS-PS model. The WS stands for wage setting, PS for price setting.


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