2.3.1 Characteristics of AS

1. AS Curve

• AS = total output firms are willing and able to supply at different price levels (ceteris paribus)

SRAS (Short-Run)

• Upward sloping

• Due to price stickiness (e.g. wages)

• Higher prices → ↑ profits → ↑ output

LRAS (Long-Run)

• Vertical at potential GDP

• All prices flexible

• Output determined by:

  • Labour

  • Capital

  • Technology

2. Movement vs Shift

Movement Along AS

• Caused by change in price level

• ↑ Price level → ↑ quantity supplied

• (e.g. demand-pull inflation)

Shift of AS

SRAS Shifts

• Right (increase AS):

  • ↓ costs (wages, raw materials)

  • ↑ productivity / technology

• Left (decrease AS):

  • ↑ costs

  • Supply shocks (e.g. COVID, oil prices)

LRAS Shifts

• Right (economic growth):

  • ↑ labour force

  • ↑ capital

  • ↑ technology

• Left:

  • Loss of resources

  • Falling workforce

3. SRAS vs LRAS Relationship

• SRAS: short-term deviations from full employment

• LRAS: long-run equilibrium (full capacity)

✔ In the short run:

• Economy can be above/below potential

✔ In the long run:

• Economy returns to potential output

4. Key Concepts

• Price stickiness = slow wage/price adjustment

• Supply shocks = sudden changes in costs/supply

• Potential GDP = maximum sustainable output

5. Key Economists

• Keynes

  • Focus on aggregate demand

  • Explained sticky prices → upward SRAS

• Friedman

  • Emphasised expectations & natural unemployment

  • Long run is independent of price level

• Lucas

  • Rational expectations

  • Policy effectiveness depends on expectations

6. Quick Evaluation Points

• SRAS shifts are often temporary

• LRAS shifts determine long-term growth

• Supply shocks can cause inflation + lower output (stagflation)

1-Line Summary

• SRAS = short-run, upward (sticky prices)

• LRAS = long-run, vertical (capacity of economy)