LRAS, SRAS, and Supply Shocks

What is aggregate supply?

The amount of real output firms are willing and able to produce.

What is LRAS?

Long-run aggregate supply: productive output at potential GDP.

Why is LRAS vertical?

Long-run productive capacity depends on resources and productivity, not the price level alone.

What shifts LRAS right?

More labor or capital, better technology, improved skills, resources, or institutions.

What shifts LRAS left?

A lasting loss of productive resources or productive capacity.

What is SRAS?

Short-run aggregate supply: the relationship between the price level and output supplied.

Why does SRAS slope upward?

Some wages and input prices adjust slowly, so higher output prices can raise profitability.

What shifts SRAS right?

Lower input costs, better productivity, favorable supply conditions, or lower expected costs.

What shifts SRAS left?

Higher input costs, reduced productivity, disruptions, or higher expected costs.

What is a supply shock?

A sudden event that changes production costs or productive capacity.

What is a negative supply shock?

An adverse event, such as an oil-price spike, that shifts SRAS left.

What are the effects of a negative supply shock?

Higher price level, lower real GDP, and potentially higher unemployment.

What is a positive supply shock?

A favorable event, such as lower energy costs, that shifts SRAS right.

What are the effects of a positive supply shock?

Higher real GDP and lower inflationary pressure, all else equal.

How can a lasting productivity improvement affect LRAS and SRAS?

It can shift both curves right, increasing current output and long-run productive capacity.