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 

2-3-1-aggregate-supply

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
     

77ro3X16_2-3-1-aggregate-supply---movement-along-sras

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

2-3-1-aggregate-supply---shift-in-sras

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)

Change in Condition

Explanation

Impact on SRAS

Changes to the costs of raw materials/energy



  • As the price of input costs rise, fewer goods/services can be produced with the same amount of money

SRAS decreases - shifts left

  • As the price of input costs decrease, more goods/services can be produced with the same amount of money

  • Factors which influence the input costs include wage rates, interest rates, government regulation and exchange rates

SRAS increases - shifts right

Changes in indirect taxes




  • Indirect taxes represent an additional cost for firms

  • Decreasing taxes =  decrease in costs
    Lower costs = more output

SRAS increases - shifts right

  • Increasing taxes =  increase in costs
    Higher costs = less output

SRAS decreases - shifts left

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