If they are unable to meet demand, they will place backorders for customers. The demand increase is passed through to wholesalers , who behave similarly. Studies have shown that marginal cost is relatively constant over wide output ranges, so again prices may change little. The demand for raw materials and for labor increases. Factor prices rise, since more inputs can be obtained only at higher prices.
Wholesalers respond by raising wholesale prices.
Finally, retailers react to higher wholesale prices by raising the prices customers must pay. The entire process of aggregate demand increase to resulting increase in the price level takes considerable time. Costs must rise before prices increase. Cost increases are not the real problem. Putting the Model Through Its Paces Now that we have discussed the underpinnings of the short-run model, let's see how it works in response to various shocks.