2.3.2 Short run AS

Main cause of a shift in SRAS is a change in the cost of production which can be caused by these three factors

• Change in costs of raw materials and energy

• Changes in exchange rates

• Changes in tax rates

The SRAS curve shifts when there are changes in the conditions of supply. This is usually in the form of costs to businesses

- The cost of raw materials and energy may change. A rise in their costs would increase costs for businesses and thus decrease SRAS from SRAS1 to SRAS3.

- A stronger currency reduces the price of imports, so imported products will be cheaper. This would reduce business costs. The AS curve would shift outwards, from SRAS1 to SRAS2.

Increased tax rates would increase business costs and therefore decrease SRAS from SRAS1 to SRAS3.

Synoptic point

SRAS is determined by the cost of production. If microeconomic changes, such as the price of raw materials or indirect taxes, affect enough businesses, they will have macroeconomic impacts through a change in SRAS.