Sticky-Wage Theory of SRAS vs Sticky-Price Theory (Menu Cost Theory) of SRAS

The sticky-wage theory says SRAS slopes upward because nominal wages adjust slowly, so a higher price level raises firm profits and output in the short run.

Because many wages are fixed by contracts or norms, they do not change immediately when the price level rises. When output prices increase but wages stay put, real labor costs fall and profit margins widen, so firms hire more and expand production. This effect is temporary: once wage contracts are renegotiated to reflect higher prices, real wages and output return to the long-run level, which is why LRAS is vertical. It is one of three standard explanations (along with sticky-price/menu-cost and misperceptions) for the upward-sloping SRAS.

The sticky-price (menu cost) theory says SRAS slopes upward because some firms keep prices fixed despite menu costs, so rising overall prices boost their sales and output.

Changing posted prices is costly (reprinting menus/catalogs, updating systems, annoying customers), so many firms hold prices steady in the short run. When the general price level rises, firms with sticky prices become relatively cheaper, their sales rise, and they increase output. As menu costs are eventually paid and all prices adjust, this output boost disappears, returning the economy to potential output. It is one of the three textbook explanations for an upward-sloping SRAS curve.