Sticky wages and input prices can explain why profits change along a short run aggregate supply curve.

Question

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Sticky wages are wages that are slow to adjust in response to changes in the overall level of prices. Input prices are the prices paid for the inputs necessary to produce goods or services. In the short run, when wages are sticky and input prices are fixed, if the price of output rises, firms can increase their profits because they are able to sell their output at a higher price without incurring additional costs. Conversely, if the price of output falls, firms may experience a decrease in profits because they are unable to reduce the wages paid to workers or the prices paid for inputs. Therefore, sticky wages and input prices can explain why profits change along a short run aggregate supply curve.

Sticky Wages and Input Prices Can Explain Why Profits Change