Why might the AS curve become inelastic?

The AS curve may become inelastic due to factors such as full employment, fixed supply of resources, or production capacity constraints.

The Aggregate Supply (AS) curve can become inelastic due to several reasons. One of the primary reasons is when an economy reaches full employment. At full employment, all available resources are being utilised to their maximum potential. This means that even if the price level increases, firms cannot increase output because there are no additional resources to employ. Therefore, the AS curve becomes vertical or inelastic, indicating that output cannot be increased beyond a certain point.

Another reason for the AS curve to become inelastic is when there is a fixed supply of resources. In the short run, the supply of resources such as land, labour, and capital is fixed. Therefore, even if there is an increase in demand, firms cannot increase output because the supply of resources is limited. This leads to a vertical or inelastic AS curve.

Production capacity constraints can also make the AS curve inelastic. If firms are operating at their maximum capacity, they cannot increase output even if there is an increase in demand. This is because they are already using all their resources to their maximum potential. Therefore, the AS curve becomes inelastic.

Inflation can also lead to an inelastic AS curve. When there is high inflation, firms may be reluctant to increase output because the cost of production is high. This can lead to a situation where the AS curve becomes inelastic.

In the long run, the AS curve is typically inelastic because the economy's potential output is determined by the supply of resources, technology, and the efficiency with which these resources are used. Therefore, in the long run, changes in the price level do not affect the level of output in the economy.

In conclusion, the AS curve can become inelastic due to factors such as full employment, fixed supply of resources, production capacity constraints, and high inflation. Understanding these factors is crucial for policymakers to make informed decisions about how to manage the economy.