So there's three theories that come into play when we think about why the short-run aggregate supply curve tends to have this upward slope like we see in our graph. Okay? So some of these might be a little contradictory, but the idea is that they all tend to show why the short run would go up as the price level goes up. So let's think about the first one here, the sticky wage theory. Sticky, remember when we talked about sticky versus flexible? Sticky means more or less fixed. Right? That the wages are going to be more fixed. So sticky wage theory says that wages do not increase as quickly as the price level. So what we're going to see is the prices going up during an economic boom, but the wages don't increase as quickly, right? You don't see that your boss, you work at a coffee shop or something and the prices are going up and they're like, hey, we're charging more. Here, take more money as well. Usually, the wages don't go up as fast as the price level goes up. So what does that do for profit? If we see this selling price going up, but this wage, right? The cost of running the restaurant or running your business stays equal, well, the selling price is going up. The cost is staying the same so there's going to be more profit, right? The profit is going to be going up as well. So what does that tell us? That they're going to want to supply more, right? As those price levels go up, they're going to want to supply more because their costs are staying relatively stable while their prices are going up, so they're going to want to supply more.

Another example of why these wages are sticky is union wages. Unions usually set their wages in a contract and it's going to be fixed over several years. So if the economy starts to boom, well, those wages are fixed and they're not going to boom as well. Alright? So that's the sticky wage theory.

How about the sticky price theory? So this one kind of contradicts in the way that now we're saying that some prices do not increase in line with the price level. So now, we're saying that some of the prices aren't going up as quickly. So the sticky wage theory is saying that wages don't go up as quickly. The sticky price theory is saying some prices don't seem to go up as quickly and that's because of this idea of menu costs. We might have talked about this before but the idea of menu costs is a cost businesses face from changing prices. And the illusion here is to a restaurant having to print a new menu and the cost of printing a new menu when they're changing their prices. If they want to have higher prices, they're going to have to change the menu, reprint everything, right? So, that's going to cost them money. So maybe some restaurants would say, hey, I'd rather just keep the same menu so I don't have to put in all that money to change, to change what our money looks like.

So how does the sticky price theory relate to this short-run aggregate supply having that upward curve? Well, if those price levels do not go up so in this example of the restaurant that doesn't increase its prices, well, that restaurant's going to have lower prices compared to other places, right? And it's going to increase their sales quantity which leads to higher output, right? So at those higher price levels in the economy, these places that didn't raise their prices, even though the economy-wide prices have gone up, well, they're going to see more business and they're going to have to produce more to keep up with that higher level of business, right? When they when people go to their cheaper restaurant, right? So the sticky wage theory, sticky price theory, they both show us how, as the price level goes up, the quantity goes up, right? The quantity that's going to be supplied.

And finally, we have the misperceptions theory. I say the two most important are these two. They seem to come up the most. But misperceptions theory just It's kind of that when businesses see general price levels increase, they respond with increased output. They say, hey, the prices are going up. That's good for us. Let's produce more, right? So that's kind of a misperception that they just see higher prices and they just decide to produce more. Okay? So sticky wage theory, wages are staying fixed. Sticky price theory, some prices are staying fixed leading to more business coming in because of the lower perceived prices that they have. And misperceptions theory, people just say, hey, higher prices. Let's produce more. Cool? Alright. Let's pause here and move on to the next