3.2 Short-run Aggregate Supply (SRAS) Curve Flashcards
aggregate supply (AS)
The total planned output that domestic firms are willing and able to produce in an economy at different average price levels, over a given period of time.
AS curve
A curve that shows the planned level of real output that domestic firms are willing and able to produce and sell at various average price levels, ceteris paribus.
short run (macro)
The period in which the prices of factors of production, especially wages, are fixed, meaning firms face rigid production costs.
In the short run, the prices of factors of production, especially wages, are considered fixed. It is possible to produce more, but firms have to be convinced by higher APLs.
short run aggregate supply curve (SRAS)
In the short-run, aggregate supply (SRAS) therefore illustrates the total planned level/quantity of real output (real GDP) domestic firms are willing and able to produce at various average price levels over a certain period of time, assuming resource prices remain constant.
The curve is upward sloping because overall higher prices, ceteris paribus, for all goods and services make output more profitable and enable firms to expand their production by hiring more variable resources.
Why do average costs increase in the short run as output increases?
In the short run, the additional resources tend to be less productive (e.g. hiring extra workers quickly may mean hiring less experienced ones or overworking the current ones, which lowers productivity) , while wages tend to be fixed. This means that the average costs per unit of output will increase when more output is produced.
In short, more output = higher costs per unit because the firm has to use resources less efficiently, and it can’t change wages quickly.
Only at a higher overall price level would firms be willing to supply a larger output because their average costs increase and they need higher prices to maintain profitability.
supply-side policies
Government strategies aimed at increasing the productive capacity of the economy by improving efficiency and incentives, shifting the LRAS curve to the right, and promoting long-term economic growth.
costs (of production)
All expenditures a firm incurs to produce goods or services, including wages, rent, interest, and raw materials; changes in costs are a determinant of SRAS.
cost-push inflation
Inflation caused by a rise in production costs (e.g. wages, raw materials), leading to a leftward shift of the SRAS curve, and resulting in higher prices and lower output.
indirect taxes (macro)
Taxes on spending imposed on goods and services (e.g. VAT or sales tax), included in the price paid by consumers; an increase in indirect taxes raises costs for firms and can shift SRAS to the left.
LRAS
In the long-run however, aggregate supply is dependent upon the quantity and quality of resources and technology in the economy, thus being independent of the price level. It is vertical at the level of potential output or the full employment level of output. It can only be
increased by improvements in the quantity and/or quality of factors of production as well as improved technology.
when is the economy said to be equilibrium?
When the total planned spending equals the total planned value of production an economy is said to be in short run macroeconomic equilibrium.
2 main ways of economic thinking relevant to IB DP macroeconomics:
the Keynesian model
the monetarist / new classical model.
The difference between the two schools of economic thought becomes especially apparent when discussing the shape of the AS curve. In the short-run the different assumptions are not important and we will study one standard SR aggregate supply curve.
what creates a movement along the SRAS?
In the short run, a higher price level will create a movement along the SRAS in a country.
what shifts the SRAS curve?
overall AS is affected by changes in prices of inputs (the price of resources or average production costs). This would be illustrated as a shift of the overall SRAS.
for example:
* when there is an increase in (minimum) wage)
* a decrease in the price of an essential commodity, such as crude oil
* or a change in weather, which impacts how much of a main input is available
… the SRAS curve as a whole will be impacted. This is illustrated by a shift of the AS curve.
You may have noticed that these factors are more difficult to predict and measure than those affecting AD. It is easier for a government to attempt to manage AD in the short-run than SRAS.
supply-side schocks
Unexpected events affecting costs and overall prices and so impact
overall output. They directly affect the costs of production and the ability or willingness of firms to produce goods and services. These shocks cause the short-run aggregate supply (SRAS) curve to shift.
- Negative supply-side shocks: Increase production costs and shift SRAS left
Examples: sudden increase in oil prices, natural disasters, war, infectious diseases. - Positive supply-side shocks: Decrease production costs and shift SRAS right.
Examples: technological improvements, decrease in commodity prices, subsidies.
