Short-run Aggregate Supply (SRAS) (AQA A Level Economics)

An Introduction to Short-run Aggregate Supply (SRAS)

• Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time

Diagram: Short-run Aggregate Supply (SRAS) Curve

Diagram analysis

• The SRAS curve is upward-sloping due to two reasons

  • The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward-sloping

  • As real output increases, firms have to spend more to increase production e.g. wage bills will increase

    • Increased costs result in higher average prices

A Movement Along the SRAS Curve

• Whenever there is a change in the average price level (AP) in an economy, there is a movement along the short-run aggregate supply (SRAS) curve

Diagram: A Movement Along the SRAS Curve

Diagram analysis

• An increase in the AP (ceteris paribus) from AP₁ → AP₂ leads to a movement along the SRAS curve from A → B

  • There is an expansion of real GDP from Y₁ → Y₂

• A decrease in the AP (ceteris paribus) from AP₁ → AP₃ leads to a movement along the SRAS curve from A → C

  • There is a contraction of real GDP (output) from Y₁→Y₃

Factors that Cause the Entire SRAS Curve to Shift

• Shifts in SRAS are caused by changes in conditions of supply in an economy; this usually means changes in the costs of production

  • Changes in the cost of raw materials and energy

  • Changes in exchange rates (E/R)

  • Changes in tax rates

Diagram: A Shift in the SRAS Curve

Diagram analysis

• A decrease in costs or increase in productivity results in a shift right of the entire curve from SRAS₁ → SRAS₂

  • At every price level, output and real GDP have increased from Y₁ → Y₂

• An increase in costs or decrease in productivity results in a shift left of the entire curve from SRAS₁ → SRAS₃

  • At every price level, output and real GDP have decreased from Y₁ → Y₃

The Determinants of Short-run Aggregate Supply

• Whenever there is a change in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve

• There are multiple factors that can influence the short-run aggregate supply (SRAS). These include:

  • Changes in costs of raw materials and energy

  • Changes in wage rates

  • Changes in tax rates 

The Influences on Short-Run Aggregate Supply (SRAS)