Economics
Short Run vs Long Run Aggregate Supply Shifts
Quick fact
In the short run, a sudden increase in demand can push output above its long-run potential, but in the long run, output always returns to the level determined by resources and technology.
Why this is interesting
Think of an economy like a factory that can run at different speeds—but not all speeds are sustainable. Why does the economy sometimes produce more than its 'normal' capacity, and why can't that last?
Read the full explanation
Understanding Short Run vs Long Run Aggregate Supply Shifts
Imagine a bakery that usually bakes 1,000 loaves a day. If people suddenly want more bread, the bakery can ask workers to work overtime, use ovens at full blast, and maybe squeeze in extra batches. That's the short run: output rises because prices are 'sticky'—wages and contracts don't adjust instantly. The bakery produces more than its normal capacity, but eventually workers demand higher pay for overtime, ingredients cost more, and the bakery can't sustain that frantic pace. That's the long run: prices and wages adjust, and production settles back to what’s sustainable—the 'potential output.'
A deeper explanation
The key mechanism is price stickiness. In the short run, many prices (wages, contracts, menu costs) are slow to change. So when aggregate demand increases, firms respond by increasing production rather than raising prices immediately. This allows output to rise above potential. But as time passes, wages and input prices adjust upward, raising production costs and shifting the short-run aggregate supply curve leftward. In the long run, all prices are flexible, and the aggregate supply curve is vertical at the economy's potential output. Any shift in aggregate demand only changes the price level, not output. Supply shocks—like oil price spikes—can shift the short-run curve directly, causing stagflation. This distinction is crucial: it explains why policy can smooth business cycles in the short run but doesn't affect long-run growth.