SRAS
Key Concepts:
1. Short-Run Aggregate Supply (SRAS):
SRAS Curve: Shows the positive relationship between price level and real GDP (output) in the short run.
Why it slopes up: Because of sticky prices and wages – prices and wages don’t adjust quickly to economic changes.
2. Sticky Prices & Sticky Wages:
Sticky wages: Wages are often fixed by long-term contracts, so they don’t adjust immediately when inflation changes.
Sticky prices (Menu Costs): Businesses may avoid changing prices (like reprinting menus) even if inflation rises, making their goods cheaper in real terms, so they sell more.
3. Why Firms Produce More During Inflation (Short-Run):
If wages are fixed but prices rise, firms make more profit per unit, so they increase production.
This leads to lower unemployment because more workers are hired to produce more.
4. Short-Run Tradeoff: Inflation vs. Unemployment:
Higher inflation → Firms produce more → Lower unemployment
Lower inflation → Firms produce less → Higher unemployment
5. Shifting the SRAS Curve:
A movement along the SRAS curve = change in price level.
A shift of the SRAS curve = something changes production conditions at all price levels.
6. What shifts SRAS? Use the acronym SPITE:
SPITE | What it means |
Subsidies | More subsidies → lower costs → SRAS shifts right |
Productivity | Tech improvement → more output → SRAS shifts right |
Input Prices | Higher resource costs → SRAS shifts left |
Taxes | Higher business taxes → higher costs → SRAS shifts left |
Expectations | If firms expect higher input prices → SRAS shifts left; if they expect lower prices → SRAS shifts right |