3.2.2 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
• 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

• 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

• 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

• 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