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The sticky-wage theory provides an explanation for why the short-run aggregate supply (SRAS) curve slopes upwards. Simply put, this theory suggests that workers' wages tend to be slow to adjust to changes in economic conditions. This stickiness in wages can happen because of several factors, such as long-term labor contracts, social and legal wage norms, or even worker expectations.

When there's an increase in the overall price level in the economy, real wages—or wages adjusted for inflation—tend to decrease. This decrease makes hiring labor cheaper for businesses, incentivizing them to increase production since they can do so at a lower relative cost. More production means an increase in the total quantity of goods and services being supplied in the economy, hence the upward slope of the SRAS curve.

Furthermore, if wages were perfectly flexible and could instantly adjust to changes in the market, workers would demand higher nominal wages to maintain their purchasing power during periods of inflation. As this rarely happens immediately, the short-run is characterized by a lag, allowing output to potentially increase as businesses take advantage of lower real wage costs.

The sticky-price theory delves into the slow adjustment of prices for goods and services. Much like wages, not all prices in an economy adjust quickly to shifts in demand or supply. Reasons for this sluggish adjustment include menu costs (the cost of changing prices), long-term contracts with suppliers and customers, or a firm's desire to avoid alienating their customers with frequent price changes.

In this context, when the overall price level in the economy rises, not all firms will immediately adjust their prices. Some firms' prices remain "sticky" or unchanged due to the reasons mentioned earlier. Firms with flexible pricing may immediately increase their prices, but firms with sticky prices will continue to sell their products at the old, lower prices until they adjust. As inflation persists, these firms benefit from higher demand since their relatively lower prices attract customers, leading them to gradually increase output.

Thus, even as the overall price level increases, the aggregate supply increases too, since businesses are supplying more. This contributes to the upward slope of the SRAS curve, as firms with flexible pricing can adjust output quickly, while others catch up slowly over time.

The misperceptions theory offers another perspective on the upward-sloping nature of the SRAS curve. It has to do with how firms perceive and react to changes in the price level. According to this theory, firms might misconstrue changes in the overall price level as changes specific to their products or sector. This can result from imperfect information, where managers and business owners are not fully aware of whether a price change reflects broader economic shifts.

If the overall price level rises unpredictably, firms might misperceive this as an increased relative demand for their goods or services. Believing their prices have risen in relation to others, firms may respond by ramping up production, thinking they need to meet a now higher demand for what they are offering.

• This perceived increase benefits them temporarily until they learn about the true nature of the price change.
• This results in a temporary increase in output as firms adjust their perceptions and actions according to the new level of prices.

Consequently, these reactions by numerous firms across the economy contribute to the upward slope of the short-run aggregate supply curve. Over time, firms correct their misperceptions, but the collective reactions lend an initial upward 'kink' to the supply curve in the short run.