2.3.2 Short-Run Aggregate Supply

1. Changes in Costs of Raw Materials and Energy

Explanation:

Changes in the costs of raw materials and energy directly affect production costs for firms.

Higher costs increase the overall cost of production, shifting the SRAS curve to the left.

Lower costs decrease production costs, shifting the SRAS curve to the right.

Impact on SRAS:

Increase in Costs:

Example: A rise in oil prices increases transportation and production costs across industries.

Result: Firms reduce output at existing price levels, shifting the SRAS curve leftward.

Decrease in Costs:

Example: A significant discovery of natural resources, such as shale gas, lowers energy costs.

Result: Firms can produce more at lower costs, shifting the SRAS curve rightward.

Real-World Example:

2008 Oil Price Shock: The spike in oil prices led to increased costs for energy-dependent industries, shifting the SRAS curve leftward and contributing to global economic slowdown.

2. Changes in Exchange Rates

Explanation:

Exchange rates influence the cost of imported goods and services.

A stronger domestic currency makes imports cheaper, reducing production costs.

A weaker domestic currency makes imports more expensive, increasing production costs.

Impact on SRAS:

Appreciation of Domestic Currency:

Example: If the US dollar appreciates against the euro, the cost of importing raw materials from Europe decreases.

Result: Lower production costs shift the SRAS curve to the right.

Depreciation of Domestic Currency:

Example: If the US dollar depreciates against the yen, the cost of importing components from Japan increases.

Result: Higher production costs shift the SRAS curve to the left.

Real-World Example:

Post-Brexit Pound Depreciation: The depreciation of the British pound after the Brexit referendum increased import costs for UK firms, shifting the SRAS curve to the left.

3. Changes in Tax Rates

Explanation:

Changes in tax rates on businesses affect their cost structures and profitability.

Higher tax rates increase costs, reducing supply.

Lower tax rates decrease costs, increasing supply.

Impact on SRAS:

Increase in Tax Rates:

Example: An increase in corporate taxes raises the cost of doing business.

Result: Firms reduce output at existing price levels, shifting the SRAS curve leftward.

Decrease in Tax Rates:

Example: A reduction in payroll taxes lowers the cost of labor.

Result: Firms can afford to produce more, shifting the SRAS curve rightward.

Real-World Example:

2018 US Tax Cuts and Jobs Act: The reduction in corporate tax rates in the US lowered production costs for businesses, contributing to a rightward shift in the SRAS curve.