What’s it: Very short-run aggregate supply refers to the aggregate supply in which firms change the output to a limited extent without changing prices. It has a perfectly elastic curve, a horizontal line.
What is the difference between the very short run, the short run, and the long run in aggregate supply?
Economists divide aggregate supply into three parts or periods: the very short run, the short run, and the long run. They differ in their response to changes in the aggregate level. The very short run is the period in which prices and costs are fixed.
Meanwhile, the short run is a period in which some inputs are constant, allowing firms to earn higher margins when the price level rises and vice versa.
As a result, firms have an incentive to increase output as long as the price level rises in the short run, allowing them to make more profits. Conversely, a fall in the price level disincentives them, prompting them to cut output.
Meanwhile, the long run is the period in which all inputs are variable. Thus, there is no incentive for companies to change their production. Moreover, an increase in the price level does not incentivize them to increase production because costs increase proportionally. As a result, profit margins are constant, and they do not earn more by increasing output.
Conversely, costs also fall when the price level falls in the long run. As a result, profit margins have not changed.
Why is the very short-run aggregate supply curve horizontal?
In the very short run, prices and costs are fixed. And the economy has spare capacity to meet increasing demand. As a result, when demand increases and shifts its curve to the right, the economy can fulfill this by intensifying production and harnessing this spare capacity.
The increase in output is limited as long as the spare capacity is sufficient and businesses can cover their variable costs. As a result, an increase in output does not result in an increase in prices.
Conversely, firms run their factories less intensively when demand is weaker than expected. They may reduce working hours and hire staff to undertake maintenance and upgrade related projects which are delayed during busier periods.
What to read next
- Aggregate Supply: Types, Curves, and Determinants
- Long-Run Aggregate Supply: Its Curve And Influencing Factors
- Short-Run Aggregate Supply: Its Curve and Determinants
- Supply Shock: Examples, Causes, Effects
- Very Short-Run Aggregate Supply: Its Curve and a Brief Explanation
