2.3.2 Short-run Aggregate Supply (SRAS) Flashcards
Factors affecting the Short Run Aggregate Supply (SRAS) curve
- Changes in costs of production
- Changes in exchange rates
- Changes in tax rates
- Supply side shocks
What does a reduction in the costs of production mean for a SRAS curve?
At the same price level, more output can be produced, so the SRAS curve will shift to the right.
Examples of events causing a contraction in AS
Unexpected drop in Labour supply
- Pandemic
- Strikes
Unexpected loss in production capacity
- Power/utility supply
- Natural disasters
- IT/Web issues
Shortage of raw materials
- Components
- Natural resources
Currency fluctuations
- If it becomes too expensive to buy imports, less foreign goods are supplied to your economy.
How does a contraction in AS cause inflation?
Price rise.
How might an increase in the costs of production lead to a contraction in SRAS?
- As the costs of production increase, fewer goods and services can be produced with the same amount of money.
- So an increase in the costs of production will cause SRAS to decrease, and shift left.
How might a depreciation of exchange rates lead to a contraction in SRAS?
- Producers often import raw materials. Depreciation of the exchange rate creates a weaker economy, which makes imports more expensive, and with more expensive imports, the costs of production increase. These higher costs mean less output.
- So a depreciation of the exchange rates will decrease SRAS and shift the SRAS curve left.
How might an increase in tax rates lead to a contraction in SRAS?
- Taxes represent an additional cost for firms. Increasing taxes therefore lead to an increase in costs for firms. These higher costs mean less output.
- So a decrease in tax rates will decrease SRAS and shift the SRAS curve left.
How might a decrease in costs of production lead to a extension in SRAS?
- As the costs of production decrease, more goods and services can be produced with the same amount of money.
- So a decrease in the costs of production will cause SRAS to increase and shift right.
How might an appreciation of exchange rates lead to a extension in SRAS?
- Producers often import raw materials. Appreciation of the exchange rate creates a stronger economy, which makes imports cheaper, and with cheaper imports, the costs of production decreases. These lower costs mean more output.
- So an appreciation of the exchange rates will increase SRAS and shift the SRAS curve right.
How might a decrease in tax rates lead to a extension in SRAS?
- Taxes represent an additional cost for firms. Decreasing taxes therefore lead to a decrease in costs for firms. These lower costs mean more output.
- So a decrease in tax rates will increase SRAS and shift the SRAS curve right.
SPICED
Strong Pound = Imports Cheap, Exports Dear
Shifts in the SRAS curve
The SRAS curve will shift if there is a change in the costs of production.