Why does the SRAS curve shift due to changes in the prices of factors of production, if the short run is the "time when the price of FoP are fixed"?
why does the SRAS curve shift due to changes in the prices of factors of production (e.g change in wage rate, change in price of raw materials, change in the price of imports), if the short run definition is the "period of time when the prices of the factors of production are fixed" ?
2 Answers | Add Yours
I think that the reason that you are having trouble is that you do not, in my opinion, have the correct definition for "short run."
In texts that I have used for teaching economics the short run is not defined exactly the way you are using the term. You say that the prices of the factors of production are fixed. My books tend to say that the prices of some factors are fixed.
For example, look at the definition for short run given in the following link. I hope that helps.
I believe that the concept of short run as given by both the question of Abctest and response of Pohnpei are not correct. There is no reason why prices of any factor of production cannot change in short run. As a matter of fact a close examination of the definition of short run in the source referred by Pohnpei does not rule out such changes. TH site defines short run as:
In terms of the macroeconomic analysis of the aggregate market, a period of time in which some prices, especially wages, are rigid, inflexible, or otherwise in the process of adjusting.
The phrase "or otherwise in the process of adjusting" clearly implies that changes do take place. A little thought will make it clear that though the process of adjustment to any changes in economy may take a long time, any long term changes in price cannot take place without these happening in short terms also.
It is not possible to give a fully satisfactorily reply to the original question because on one hand it assumes that by definition of short term "the prices of the factors of production are fixed", on the other hand it assumes that these prices are changing. However I will say this much:
When prices of factors of production change, while other factors like demand function remains unchanged, the marginal cost of producers change. If the costs reduce the producers will be ready to supply more. Similarly when costs rise they would like to cut down their supplies.
We’ve answered 317,443 questions. We can answer yours, too.Ask a question