Final answer:
The quantity of goods supplied can fall below the natural level of output when actual prices fall below expected ones, resulting in decreased production and supply incentives. Over time, market forces such as changes in employment and wages can adjust output back to natural levels despite price changes. Wage increases that raise production costs can also contract supply.
Step-by-step explanation:
In the context of economics, the quantity of output supplied by firms in the short run can indeed fall below the natural level of output if the actual price level falls below the expected price level. This is mainly due to the fact that the lower price level reduces the incentive for firms to produce and supply goods and services. This scenario can be likened to the effect of a price ceiling, which, when set below the equilibrium price, causes the quantity demanded to rise and the quantity supplied to fall, thereby creating a shortage.
Moreover, from a neoclassical perspective, in the short run, an increase in unemployment can lead to stagnating or falling wages, causing a shift in the short-run Keynesian aggregate supply curve. In the long run, however, the level of output returns to the natural level or potential GDP, despite the downward pressure on the price level. These shifts reflect the market's self-correcting nature, with potential GDP and aggregate supply determining real GDP's size in the long run when prices and wages are flexible.
Furthermore, when wages increase, the cost of production rises, which may cause some firms making economic losses to shut down. As a result, the supply curve starts to shift to the left, leading to a price increase and a contraction in the quantity of output supplied in the market.
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