Imagine the economy is a giant pizza party. Aggregate supply is like the number of pizzas that can be cooked and served at different costs. Let's dive into this pizza-themed party and explore different schools of economic thought!

Short-Run Aggregate Supply (SRAS): The Early Party Hours

In the short run, the number of pizzas we can serve depends on ingredients' costs (like cheese and pepperoni) and workers' wages. Here's how it goes:

• Money Wages: Think of money wages as how many slices of pizza a chef gets paid. If a chef gets paid 60 slices but then the cost of ingredients doubles, the real wage is cut in half, and the chef can only afford 30 slices! This is the real wage.

• Why It Matters: If the cost of ingredients rises but chefs' wages stay the same, the chefs are "cheaper" for the pizza place, and they make more pizzas. If the cost of ingredients drops, chefs become "pricier," and they make fewer pizzas. The SRAS curve slopes upwards!

• What Can Change SRAS

  • Money Wages Change: If chefs demand more pizza slices as wages, it costs more to make a pizza. SRAS decreases (left shift).
  • Energy Prices Change: Think of the oven's gas price! Higher price means fewer pizzas, and vice versa.
  • Taxes or Subsidies Change: If the government adds a "pepperoni tax," costs rise, and fewer pizzas are made. If they give a "cheese subsidy," more pizzas are made!

Long-Run Aggregate Supply (LRAS): The Late Party Hours

In the long run, everything adjusts, including wages. The chefs demand more slices as wages if ingredient prices rise, so there's no change in the number of pizzas made. It's a straight line!

• Why It's Vertical: The LRAS is a wall. You've reached the full pizza-making capacity!
• What Can Change LRAS
  • More Chefs (Labour): More chefs mean more pizzas!
  • Better Ovens (Technology): Faster ovens mean more pizzas!
  • More Efficient Cooking (Efficiency): Better cooking methods mean more pizzas!
  • Easier Pizza Laws (Institutional Changes): Less red tape means more pizzas!