Final answer:
The short-run aggregate supply curve is upsloping because a rise in the price level for outputs, with input costs fixed, leads to increased production for higher profits, until the output reaches potential GDP where it becomes increasingly difficult to raise production without substantial input cost increases.
Step-by-step explanation:
The short-run aggregate supply curve (SRAS) is upsloping because as the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to increase production to earn higher profits. This condition reflects the idea that, in the short run, some production costs (such as wages and other resource prices) are sticky or inflexible, which means they do not increase as quickly as the prices of final goods and services. As a result, when the selling prices of goods and services rise, firms can make higher profits due to the lag in the increase of input costs, hence they supply more output. The potential GDP line indicates the economy's maximum sustainable output with full employment of labor and capital.
The aggregate supply curve becomes nearly vertical at levels of output that approach potential GDP because at this level, the economy's resources are fully employed, and it is difficult to increase production without rising input prices substantially. At very low levels of output—far to the left of the aggregate supply curve—the economy is well below potential GDP, and there is substantial unemployment. In this situation, even small increases in output prices can encourage a significant increase in production because there is idle labor and capital ready to be employed.