Phillips Curve Definition:
The Short-Run Phillips Curve (SRPC) shows the trade-off relationship between inflation and unemployment. The long-run Phillips Curve represents the natural rate of unemployment in the economy when it is at full capacity.
Phillips Curve Example Explanation:
The Short-Run Phillips Curve indicates that when an economy experiences low levels of unemployment, inflation is likely to be high. This usually happens in the boom phase of the Economic/Business cycle when aggregate demand (AD) is high and the economy is operating near full capacity. On the other hand, when unemployment is high, inflation is likely to be low. This would occur when the economy is in a recession where the price level is low due to a lack of AD. However, this relationship does not hold when there is stagflation (high inflation and limited economic growth), like the UK in the 1970s. When that happens, we shift the SRPC outwards indicating higher unemployment and inflation, which is synonymous to a fall in AS. Hence, one can note that changes in the Phillips Curve diagram can be attributed/explained using the AD & AS diagram.
Phillips Curve Notes with Diagrams/Graphs:
Want a closer look? Download these Phillips Curve notes.
The left video explains the Short-Run Phillips Curve, the right explains the Long-Run Phillips Curve and its relationship to the SRPC.