2.3.2 Short run AS

FACTORS

• main cause of a shift in SRAS is a change in cost of production, which can be caused by these 3 factors:

  • changes in costs of raw materials and energy

  • changes in exchange rates

  • changes in tax rates

CHANGES IN COST OF RAW MATERIALS AND ENERGY

• increase in the cost of raw materials and energy increases the cost of production

• means SRAS curve will shift left as it will cost more to make the same amount of goods- so businesses will only produce this amount of goods if prices rise

• oil prices are an important cost in determining level of SRAS, since they affect costs for almost all businesses

CHANGES IN EXCHANGE RATE

• weaker pound will lead to an increase in the price of imports- will cause SRAS to decrease as production becomes more expensive

• if pound becomes stronger, imports will be cheaper and so SRAS will increase

• particularly important in UK as we are heavily dependent on imports

• inflation the UK experienced after Brexit was caused by the fall in the pound, which pushed import prices up and led to cost-push inflation

CHANGES IN TAX RATES

• taxes increase cost of production so cause fall in SRAS (shift left)

• subsidies decrease costs so cause rise in SRAS (shift right)