Final answer:
The SRAS curve slopes upward because an increase in the price level can lead to increased production and higher profits when input prices are fixed, resulting in a positive relationship between price level and real GDP. The curve is nearly horizontal at low output levels due to excess capacity and nearly vertical at full capacity due to resource constraints. Shifts in the SRAS curve are influenced by factors that affect productivity and capacity.
Step-by-step explanation:
The economic reason why the short-run aggregate supply (SRAS) curve slopes up is due to the relationship between the price level and the quantity of real GDP supplied in the short run. When the price level for outputs increases, with the price level of inputs remaining relatively static, businesses perceive the opportunity to make additional profits, thereby increasing production. This results in a positive relationship between the price level and the level of real GDP, which explains the upward slope of the SRAS curve.
The near-horizontal shape of the SRAS curve at the far left signifies that at low levels of real GDP, firms can increase production without a significant rise in prices due to underused capacity. Conversely, the near-vertical shape of the SRAS curve on its far right reflects that at levels of real GDP that approach full capacity, increases in production are limited by resource constraints, and thus, further increases in demand primarily raise prices rather than output.
Potential GDP represents the maximum sustainable level of output an economy can produce with its existing levels of workers, physical capital, technology, and institutions. Factors such as technology improvements, increases in physical or human capital, or regulatory changes can cause the SRAS curve to shift. For example, productivity gains could shift the SRAS curve to the right, leading to higher real GDP and lower price levels if aggregate demand remains unchanged.