Short-run Aggregate Supply (SRAS)

Definition

Short-run aggregate supply (SRAS) refers to the relationship between the total quantity of goods and services supplied in an economy and the general price level, when some factors of production are fixed in the short run. It represents the willingness and ability of producers to sell their output at different price levels, given the existing production capacity and technology.

5 Must Know Facts For Your Next Test

1. The SRAS curve is typically upward-sloping, reflecting the law of supply, which states that as the price level rises, the quantity supplied also increases.
2. The slope of the SRAS curve is determined by the degree of price flexibility in the economy, with a steeper slope indicating greater price flexibility.
3. Factors that can shift the SRAS curve include changes in input prices, productivity, and government policies that affect the cost of production.
4. In Keynesian analysis, the SRAS curve is assumed to be relatively flat in the short run, implying that changes in aggregate demand can have a significant impact on real output and employment.
5. The interaction between aggregate demand and short-run aggregate supply determines the equilibrium price level and real output in the economy.

Review Questions

• Explain how the short-run aggregate supply (SRAS) curve is determined and how it differs from the long-run aggregate supply (LRAS) curve.
  • The SRAS curve represents the relationship between the quantity of goods and services supplied and the price level in the short run, when some factors of production are fixed. The SRAS curve is typically upward-sloping, reflecting the law of supply, as producers are willing to sell more at higher prices. In contrast, the LRAS curve represents the maximum output an economy can produce when all factors of production are fully utilized, and it is not affected by changes in the price level. The LRAS curve is generally vertical, indicating that changes in aggregate demand can only affect the price level in the long run, not real output.
• Describe how the interaction between aggregate demand and short-run aggregate supply determines the equilibrium price level and real output in the economy.
  • In Keynesian analysis, the intersection of the aggregate demand (AD) curve and the short-run aggregate supply (SRAS) curve determines the equilibrium price level and real output in the economy. If aggregate demand increases, the AD curve shifts to the right, leading to an increase in both the price level and real output in the short run. Conversely, if aggregate demand decreases, the AD curve shifts to the left, resulting in a decrease in both the price level and real output. The degree to which changes in aggregate demand affect real output versus the price level depends on the slope of the SRAS curve, with a flatter SRAS curve indicating a greater impact on real output.
• Analyze how changes in factors such as input prices, productivity, and government policies can affect the short-run aggregate supply (SRAS) curve.
  • Changes in various factors can shift the short-run aggregate supply (SRAS) curve. For example, an increase in input prices, such as wages or the cost of raw materials, would increase the cost of production for firms, causing the SRAS curve to shift to the left, resulting in a higher price level and lower real output. Conversely, an increase in productivity, such as through technological advancements or improved efficiency, would lower the cost of production and shift the SRAS curve to the right, leading to a lower price level and higher real output. Government policies that affect the cost of production, such as changes in taxes, regulations, or subsidies, can also shift the SRAS curve and impact the equilibrium price level and real output in the economy.

Related terms

Aggregate Supply: Aggregate supply is the total quantity of goods and services that firms are willing to sell at different price levels in an economy during a specific time period.

Long-run Aggregate Supply (LRAS): Long-run aggregate supply (LRAS) represents the maximum output an economy can produce when all factors of production are fully utilized, and it is not affected by changes in the price level.

Keynesian Analysis: Keynesian analysis focuses on the role of aggregate demand in determining the level of economic activity, with the assumption that prices and wages are sticky in the short run.