2f. Short run aggregate supply

Aggregate supply

The aggregate supply curve shows the total level of goods and services that can be produced in an economy over a period of time

• In the short run at least one factor of production is fixed
• In the long run all factors of production are variable

Short run aggregate supply

In the short-run increasing production is likely to increase costs and hence prices.

In the short-run as the quantity of abour is fixed, so firms will have to pay their existing staff higher overtime wages

Changes to short run aggregate supply

Firms’ costs change (but the factors of production are constant)

This could be due to:

• Change in raw material prices
• Change in exchange rate
• Change in indirect taxes
• Changes in labour costs
• Change in subsidies
• Change in regulation

Supply side shocks

Any significant change in wage rates, raw materials prices or taxes can lead to a supply side shock.

For example, a doubling in the price of oil can have a huge impact on aggregate supply pushing SRAS upwards