Why might the short-run AS curve slope upwards?

The short-run aggregate supply (AS) curve slopes upwards due to the law of supply and the existence of inflexible inputs.

The law of supply states that as the price level rises, firms are willing to produce more goods and services. This is because higher prices mean higher revenues, which can cover the costs of production and potentially lead to higher profits. Therefore, in the short run, as the price level increases, the quantity of goods and services that firms are willing to produce also increases, causing the AS curve to slope upwards.

In addition, the existence of inflexible inputs also contributes to the upward slope of the short-run AS curve. In the short run, some factors of production, such as capital and labour, are fixed. This means that firms cannot immediately adjust these inputs in response to changes in the price level. As a result, when the price level rises, firms can only increase production by using their existing inputs more intensively, which often leads to higher costs. These higher costs, in turn, cause firms to supply more goods and services at higher prices, resulting in an upward-sloping AS curve.

Furthermore, the short-run AS curve may slope upwards due to the presence of nominal wages. Nominal wages are wages that are set in money terms and do not adjust immediately to changes in the price level. Therefore, when the price level rises, the real wage (the purchasing power of the nominal wage) falls, making labour cheaper. This encourages firms to hire more workers and increase production, which again causes the AS curve to slope upwards.

Finally, menu costs can also cause the short-run AS curve to slope upwards. Menu costs are the costs of changing prices, such as the costs of printing new menus or catalogues. When the price level rises, firms may choose to keep their prices unchanged in the short run to avoid these costs, which means they will supply more at higher price levels, contributing to the upward slope of the AS curve.