SRAS Flashcards
Aggregate supply
The total output of goods and services produces within an economy at a specific price level. It represents ability of an economy to produce goods and services in the short or long term.
Short vs Long run
There is an idea that an economy behaves differently depending on the length of time it has to react to certain changes/stimuli.
Short run
Shorter time period- wages and prices cannot be changed just yet
Long run
Longer time periods- firms have time to respond to changes e.g. time to build a bigger factory or employ more to achieve higher output levels
Types of aggregate supply
SRAS- Short run aggregate supply
LRAS- Long run aggregate supply
SRAS
Represents all the goods and services that firms are willing to produce
The SRAS graph
It slopes upwards and changes in cost of production causes a shift. If COP reduces, more can be produces so SRAS shifts right (and vice versa). It shows actual output of economy. The Price level also changes.
Axis
X-axis= Real national Output (Y,Y1…)
Y-axis= Price Level (PL,PL1…)
Usual causes of SRAS shifts
Changes to COP shifts SRAS such as:
Wage rates - labour costs
Commodity prices - raw materials such as oil, natural gas and copper
Exchange rates - fall (depreciation) in exchange rates makes importing raw materials from overseas more expensive.
Changes in taxes - Producer and environmental taxes
Other production costs such as material prices and rent for retailers
Supply Shocks
Positive or negative shocks. Usually unexpected
Positive shocks
Anything that shifts SRAS down and right (decreases COP) e.g. increase in labour force and decrease in labour costs
Negative shocks
Anything that shifts SRAS up and left (increases COP) e.g. depletion of natural resources and natural disasters
