How do wages and resource costs behave in the long run compared to the short run?

In the long run, wages and resource costs are considered more flexible compared to the short run. This flexibility allows them to adjust to changes in demand and supply conditions, leading to a return to a natural level of employment and output. In contrast, in the short run, wages and resource costs tend to be more rigid due to contracts, social norms, and other factors that prevent immediate adjustments.

When economies experience changes in aggregate demand, businesses may react by altering production levels and employing different labor resources. However, wages may not adjust quickly to these changes in the short run, reflecting a temporary state of disequilibrium. Over time, as contracts expire and new agreements are made, wages will adjust to reflect the overall economic conditions, leading to greater flexibility and responsiveness in the long run. This dynamic ensures that the economy can move towards a new equilibrium as external factors change.

Understanding this distinction between short-run rigidity and long-run flexibility is crucial in analyzing how economies respond to shocks and shifts in the aggregate demand and aggregate supply.