2.3.2 - Short Run Aggregate Supply

Question 1

What is short run aggregate supply (SRAS)

Answer 1

The relationship between planned national output and the general price level

• a rise in the general price level should stimulate expansion of aggregate supply as businesses respond to profit motive
• short run AS curve upwards sloping because higher prices for goods and services make output more profitable and enable businesses to expand production by hiring extra labour and resources

Question 2

Aggregate supply and spare capacity

Answer 2

• when a business is not making full use of it’s available capacity
• spare factors of production e.g. land, labour and capital
• when economy has plenty spare capacity SRAS is elastic

Question 3

Causes of shifts in SRAS

Answer 3

SRAS shifts if costs of production change - costs rise, SRAS shifts inwards. Costs fall, SRAS shift outwards

• changes in resource prices
• business taxes, subsidies, regulations and imported costs
• cost of imported components
• unexpected supply shocks that affect the price of raw materials

Question 4

Causes of a fall (inward shift) of SRAS

Answer 4

• rise in raw material prices
• energy costs
• unit labour costs

Question 5

Causes of a rise (outward shift) in SRAS

Answer 5

• fall in unit labour costs
• decline in energy costs

Question 6

External factors affecting SRAS

Answer 6

• world oil and gas prices
• energy prices/costs
• other mineral/metal prices
• foodstuff prices
• import tariffs/quotas