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)
Change in Condition | Explanation | Impact on SRAS |
Changes to the costs of raw materials/energy |
| SRAS decreases - shifts left |
| SRAS increases - shifts right | |
Changes in indirect taxes |
| SRAS increases - shifts right |
| SRAS decreases - shifts left |
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