These firms are able to produce additional units of output at the same marginal cost as previous units, since most firms aren t producing at maximum capacity most of the time. A final attribute, noted in our discussion of advertising, is that most firms depend on repeat customers for most of their sales. Retail outlets attract customers by offering the range of goods of a particular quality that their regular customers expect. They also charge prices that their regular customers expect. When these three attributes are brought together, an interesting result emerges.
Most retail firms change prices very little in response to changes in demand.
This pattern of behavior implies that prices at the retail level the prices that matter to consumers don t change much unless marginal costs change . But marginal costs depend on input prices the prices of energy and raw materials and the wages of labor. So long as input prices remain constant, marginal cost remains constant, and firms tend to maintain constant prices for their products. Firms produce and sell more goods when AD rises and fewer goods when AD falls. In the short run a period that lasts at least at year the aggregate supply curve is essentially flat.