Short-run Aggregate Supply (SRAS) (DP IB Economics): Revision Note

The SRAS Curve

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

• The short run is a period in which wages and other factor prices are inflexible

• The long run is a period in which there is full wage and factor price flexibility 

A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy

• The AS 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
   

An increase or decrease in the average price level (AP) causes a movement along the short run aggregate supply (SRAS) curve leading to a contraction or expansion of the quantity supplied

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

    • Y is the symbol used in macroeconomics to denote national income or real GDP

• 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

Shifts of the Entire SRAS Curve

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

A shift in the entire short run aggregate supply (SRAS) curve occurs due to a change in one of the non-price determinants of supply

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 Non-price Determinants of the SRAS Curve

• There are two main factors that can influence the short-run aggregate supply (SRAS). They are

  • Changes in costs of raw materials and energy

  • Changes in indirect taxes
    

Explaining the Influences on Short-run Aggregate Supply (SRAS)