This is an updated revision presentation covering some of the factors that determine short run aggregate supply (SRAS) in an economy.

1. AS Economics
Short Run Aggregate Supply
AS Economics, Autumn 2013
tutor2u™

2. Short Run Aggregate Supply (SRAS)
• Aggregate supply (AS) is the quantity of goods
and services that businesses are willing and
able to produce at a given level of prices
• SRAS is the relationship between real GDP and
the price level
– SRAS shows how much output the economy can
generate in the short term at each price level
– A rise in the price level should stimulate an
expansion of supply
– When prices are falling, production may contract

3. Short Run Aggregate Supply (SRAS)
• We hold the following constant:
– Wage rates for labour
– Other resource prices such as raw material prices
and component prices
• Changes in aggregate demand cause either a
contraction or an expansion along the SRAS
curve
– An outward shift of AD will cause an expansion
along the SRAS curve
– An inward shift of AD will cause a contraction
along the SRAS curve

4. Short Run Aggregate Supply Curve
Price Level
SRAS1
P2
P1
Y1
Y2
Real National Output

5. Short Run Aggregate Supply Curve
Price Level
SRAS1
P2
P1
Y1
Y2
Real National Output

6. Short Run Aggregate Supply Curve
Price Level
SRAS1
A rise in the price level
will cause an
expansion of
aggregate supply in
the economy
P2
P1
AD2
AD1
Y1
Y2
Producers are
responding to higher
prices (driven up by
increased demand)
Real national output
will increase from Y1
to Y2
Real National Output

7. Some Causes of Shifts in Short Run
Aggregate Supply (SRAS)
Labour
productivity
Changes in
import prices
Wage Costs
Prices of raw
materials
Price of
components

8. Shifts in short run aggregate supply
• Costs of production
– Wage costs
• Minimum wages
• Impact of migration of workers on labour costs
– Raw material and component prices (inputs into production)
• Taxes that businesses have to pay
– VAT
– Import tariffs and other protectionist measures
– Environmental taxes / charges such as climate change levies
• Labour productivity
• Factor mobility and economic incentives facing workers and firms
• Changes in the exchange rate – which affects the price of
imported components
• Many SRAS shifts are caused by external economic shocks

9. External supply shocks
World oil and
gas prices
Import tariffs
/ quotas
Foodstuff
prices
Energy prices
/ costs
Other mineral
prices

10. Inward Shift in SRAS
SRAS2
Price Level
SRAS1
P1
Inward shift of SRAS
Less output can be supplied at
each price level
Y2
Y1
RNO

11. Outward Shift in SRAS
SRAS2
Price Level
SRAS1
P1
SRAS3
Outward shift of
SRAS
More output can
be supplied at
each price level
Y2
Y1
Y3
RNO

12. Crude oil prices affect production costs
The UK is now a net importer of
oil – it is an input used in many
different industries

13. How might wheat prices affect SRAS?
Which industries / sectors use
wheat as a key factor input?

14. Steel prices will also affect SRAS
Falling steel prices would reduce
supply costs in the construction
industry causing SRAS to shift
outwards

15. International commodity prices
Commodity prices have
been highly volatile in
recent years

16. The Keynesian non-linear SRAS curve
SRAS
Price Level
Between Y1 and Y2, short run
aggregate supply is elastic –
because there is plenty of spare
capacity in the economy
P2
AD2
P1
AD1
Y1
Y2
RNO

17. The Output Gap and the Economic Cycle
When an economy is coming out
of recession, the output gap is
negative and SRAS is likely to be
elastic because of spare capacity

18. When SRAS is vertical, capacity is reached
LRAS
Price Level
In this equilibrium at
AD3, Y3 – SRAS is
drawn as inelastic –
where bottlenecks in
the supply chain
make it difficult to
supply extra output
when there is an
increase in AD
P3
AD3
SRAS
Y3
Yfc
RNO

19. When SRAS is vertical, capacity is reached
LRAS
Price Level
P4
AD4
P3
AD3
SRAS
Y3
Yfc
RNO

20. When SRAS is vertical, capacity is reached
When SRAS is
inelastic, an increase
in AD will tend to
cause a larger rise in
the price level and
relatively little extra
real output (Y)
LRAS
Price Level
P4
AD4
P3
AD3
SRAS
Y3
Yfc
RNO

21. Capacity Pressures in the UK Economy
At the tail end of a boom, shortages
of skilled workers and key raw
materials and components can
cause a capacity constraint – making
SRAS inelastic

22. The Keynesian non-linear SRAS curve
SRAS
Price Level
P4
AD4
P3
AD3
P2
AD2
P1
AD1
RNO

23. Non-linear SRAS curve
• When the economy has plenty of spare capacity – SRAS
will be elastic
– Rise in AD can be met easily by increased output
– Little threat of rising prices (inflation)
• Elasticity of SRAS curve falls as output increases
– Spare capacity falls
– Possibility of diminishing returns in production
– Bottlenecks in supply of inputs and components
• When SRAS becomes perfectly inelastic the economy has
reached full capacity
• Further increases in AD at this point are purely
inflationary.

24. Inward shift of short run aggregate supply
Price Level
SRAS2
SRAS1
P2
P1
AD1
Y2
Y1
Real National
Output (Y)

25. Take a quiz to test your understanding!

26. Tutor2u Economics
Keep up-to-date with economics,
resources, quizzes and
worksheets for your economics
course.