Characteristics of Aggregate Supply (Edexcel A Level Economics A)

The Aggregate Supply (AS) Curve

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

• 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 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 (extension) 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

A shift of the entire SRAS curve

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

Diagram analysis

• A decrease in labour costs 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 labour costs 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 Relationship Between Short-run & Long-run AS

• Short run aggregate supply (SRAS) is influenced by changes in the costs of production

  • Short run refers to the time period where at least one factor of production is fixed

• Long run aggregate supply (LRAS) is influenced by a change in the productive capacity of the economy

  • Productive capacity is changed by changes to the quantity or quality of the factors of production

    • When production capacity changes, it is equivalent to a shift inwards/outwards of the production possibilities frontier (PPF)

• Long term economic growth requires the productive capacity to increase