Short Run Aggregate Supply

What happens to factors of production in the short term

At least one of the FoP is fixed and cannot be changed

Determinants of SRAS

costs of production:

• wages

• FoP prices

• productivity

• state of technology

• taxes

• exchange rate

SRAS : decrease in GPL

as GPL decreases, there is a contraction in SRAS leading to less profit (movement)

SRAS : increases in GPL

as GPL increases, there is an expansion in SRAS leading to more profit (movement)

AGGREGATE SUPPLY

the quantity of goods and services that producers in an economy are willing and able to supply at given price levels

SRAS : shift right

• increases in SRAS

• costs low

• shift right

• decrease in GPL (less cost push inflation)

SRAS : shift left

• decreases in SRAS

• costs high

• shift left

• increases in GPL (more cost push inflation)

causes of left shift

• increases in taxes (VAT)

• technology costs up

• weak £, expensive materials

• supply side shock (an unanticipated event)

• productivity down

• wages increased

• subsidy going down

causes of right shift

• decreases in taxes (VAT)

• technology costs down

• strong £, cheaper materials

• productivity up

• wages decreased

• subsidy on products

10 marker - key notes

• ceteris paribus

• cost push inflation

• effects on profit (for movements)