Can anyone explain to me why the VSRAS is horizontal (perfectly elastic)?
In the very short run, all costs/prices are fixed.
(And if you ask how short the very short run is, the answer is that it’s short enough that all costs/prices are fixed; that’s its definition.)
Would you change the prices of your restaurant daily? weekly? monthly? It is most likely you would change it with a clear change in the prices of the whole economy (i.e. inflation). So in the very short term prices are fixed because a higher production is more likely after the short-term.
For example, your restaurant can receive 50 people at the same time, however you see other 40 people waiting outdoors for a table. Will you be able to expand your restaurant to attend 90 people next day? Impossible. Also, you won’t rise prices because the fear to lose clients. This happens in the short-term.
So, in the short term, there is more sensitivity to price levels?
Yes, the SRAS is more elastic in the short run (and thus more sensitive to changes in the aggr. price level) because (as the comments above mentioned) companies cannot react to changes in the aggregate price level by adjusting their own prices. in the short run. What we observe is, that as prices for instance increase (i.e. inflation), the aggregate output level increases too (thus the upward slope of the AS curve), and the more we are in the short run the stronger is the this reaction (more elastic, thus flatter AS). One reasone being, that as prices increass, profits increase and companies increase production. Now in the long run, none of this happens, because prices are flexible, when companies observe an overall increase in the price level, they are too able to increase their own prices (their input costs increase e.g., so now they can actually react). Thus, in the long run the AS curve is not elastic and thus just a vertical line.
Maybe what I do not get is why the change in quantity supplied with change in price level is greater in the short term than the long term? I would figure that it would take longer to produce greater/adjust for less output with change in aggregate price level…
I do see your point. Think about it this way: In the short run all the production costs are fixed (e.g. nominal wages are set for one year periods typically). Now if the aggregate price level increases, profit margins of the companies improve, since their production costs stay the same but their sales prices are increasing, which causes them to increase their production levels (or think of it as new companies entering the market because they hear of those great profit margins). The more we are in the short run, the stronger will be this adjustment in output because production costs are “more” fixed. As we move towards the long run, our productions costs become more flexible (once you go beyond a year, you can re-negotiate wages), which means as the aggregate price level changes, our production costs also change. Imagine that aggregate prices increase by 5% completely surprisingly. Companies will have their workers on one year contracts and those cannot be re-adjusted until one year passes. So within that one year, profit margins for the company improve, it produces more, but after one year the workers demand higher wages (since have been observing a 5% wage decrease over the last year in real terms), and now the company’s profit margins are at back where they were before the increase in prices. And the more we go into the long run, the more will this re-negotiation process take away any short term gains from changes in prices. Thus in the very long run, any change in aggr. prices will be met with a corresponding change in production costs, and thereby render the change in prices without any effect.