2.2.5 Short run Aggregate Supply

What is short run aggregate supply

the total planned output of goods and services in an economy at a given price level, assuming that at least one factor of production is fixed

Why is the SRAS curve upward sloping

because in the short run, higher output leads to higher unit costs e.g overtime wages.

Firms therefore need a higher price to make additional production worthwhile

Draw a SRAS curve

What is a shift in the short run aggregate supply caused by

by a change in the costs of production for firms

this changes the level of output firms are willing to supply at every given price level

What are the 6 factors affecting SRAS

• costs of raw materials or energy

• labour costs

• exchange rates

• subsidies

• supply shocks

  • indirect taxes

How does the cost of raw materials/energy influence SRAS:

decrease in cost of raw materials or energy, decreases production costs. SRAS shifts to the right.

Increase in cost SRAS shifts to the left

what are the key influencing factors of SRAS: labour costs

labour costs: fall in labour costs, decreased in production costs. SRAS shifts to the right

A rise in labour costs, SRAS shifts to the left

how do exchange rates influence SRAS

A depreciation of the domestic currency makes imported raw materials more expensive, raising production costs and shifting SRAS to the left. An appreciation has the opposite effect.

how do indirect taxes influence SRAS

An increase in indirect taxes raises production costs, shifting SRAS to the left. A decrease in indirect taxes lowers production costs, shifting SRAS to the right.

how do subsidies influence short run aggregate supply

Government subsidies can lower production costs, shifting SRAS to the right. The removal of subsidies can raise costs, shifting SRAS to the left.

how do supply shocks cause changes in SRAS

Unexpected events, such as natural disasters or sudden changes in oil prices, can affect production costs and shift SRAS. A negative supply shock shifts SRAS to the left, while a positive supply shock shifts it to the right.

decreased costs of production shift representation on curve