SRAS

Short-Run Aggregate Supply (SRAS) Curve

Shows the positive relationship between price level and real GDP (output) in the short run.

Why does the SRAS curve slope up?

Because of sticky prices and wages; prices and wages do not adjust quickly to economic changes.

Sticky wages

Wages that are often fixed by long-term contracts, not adjusting immediately when inflation changes.

Sticky prices (Menu Costs)

Businesses may avoid changing prices even if inflation rises due to costs like reprinting menus, resulting in lower real prices.

Why do firms produce more during inflation in the short run?

If wages are fixed but prices rise, firms make more profit per unit, leading to increased production.

Short-Run Tradeoff: Inflation vs. Unemployment

Higher inflation leads to more production and lower unemployment; lower inflation leads to less production and higher unemployment.

Movement along the SRAS curve

Represents a change in the price level.

Shift of the SRAS curve

Occurs when something changes production conditions at all price levels.

What are the factors that shift SRAS? (SPITE)

Subsidies, Productivity, Input Prices, Taxes, Expectations.

Subsidies effect on SRAS shift

More subsidies lower costs, shifting SRAS to the right.

Productivity effect on SRAS shift

Improvements in technology increase output, shifting SRAS to the right.

Input Prices effect on SRAS shift

Higher resource costs shift SRAS to the left.

Taxes effect on SRAS shift

Higher business taxes raise costs, shifting SRAS to the left.

Expectations effect on SRAS shift

If firms expect higher input prices, SRAS shifts left; if they expect lower prices, SRAS shifts right.