Module 3.3 & 3.4: Short-Run and Long-Run Aggregate Supply

The Short-Run Aggregate Supply (SRAS) Curve

  • Definition and Slope: The short-run aggregate supply (SRAS) curve is characterized as being upward sloping.
  • Resource Price Behavior: The upward slope of the SRAS exists because wages and resource prices are considered "Sticky" in the short run.
  • Short-Run Relationship: The SRAS indicates that there is a relationship between wages and resource prices in the short run. (Note: The transcript identifies this section but does not specify the direction of the relationship in the provided text).
  • Price Level Impact on Real GDP:     * Increased Price Level: An increase in the price level will impact real GDP on the short-run aggregate supply curve by causing an increase in output (movement up along the curve).     * Decreased Price Level: A decrease in the price level will impact real GDP on the short-run aggregate supply curve by causing a decrease in output (movement down along the curve).

Determinants of SRAS: Shifts and Movements

External events and economic changes affect the SRAS either by shifting the curve or causing movement along it. The following specific scenarios illustrate these effects:

  • Decrease in Energy Prices: This event results in a Shift Right (Increase) of the SRAS curve.
  • Increase in Wages: This event results in a Shift Left (Decrease) of the SRAS curve.
  • Deflation: This economic condition causes a Movement Down Along the Curve.
  • Increase in Business Taxes: When the government increases taxes on businesses, it causes a Shift Left (Decrease) of the SRAS curve.
  • Increase in CPI (Consumer Price Index): An increase in the CPI leads to a Movement Up Along the Curve.
  • Increase in Worker Productivity: An improvement in the productivity of workers results in a Shift Right (Increase) of the SRAS curve.
  • Increase in the Expected Rate of Inflation: A rise in the anticipated rate of inflation causes a Shift Left (Decrease) of the SRAS curve.

The Long-Run Aggregate Supply (LRAS) Curve

  • Curve Shape and Positioning: The long-run aggregate supply (LRAS) curve is vertical. It is positioned at the full employment level of output (referred to as "Increased output" in the text).
  • Resource Price Behavior: In the long run, wages and resource prices are considered "flexible."
  • Long-Run Relationship: The LRAS illustrates that there is no relationship between wages and resource prices in the long run, implying that changes in the price level do not affect the quantity of real GDP supplied in the long run.