2.3.2 - Short-run AS

Question 1

What factors affect SRAS

Answer 1

o changes in costs of raw materials and energy
o changes in exchange rates
o changes in tax rates

Question 2

Changes in costs of raw materials and energy

Answer 2

• As the cost of raw materials and energy increases this increases production costs for firms Which will decrease their profits as their cost of productions has gone up (assuming that their revenue also stays the same). As a result they can either increase the price to increase their demand(this will only be effective if their good/service is demand inelastic) or they would just decrease the supply of that good or service to maintain their profit margin. Which will shift SRAS to the left.

Question 3

Changes in exchange rates

Answer 3

• A weaker pond(depreciation of the pound) will lead to an increasing the price of imports.This will increase the costs of production for all firms within the economy as they have to pay a higher price for any goods/services that they decide to import. Which will decrease their profits as their cost of productions has gone up (assuming that their revenue also stays the same). As a result they can either increase the price to increase their demand(this will only be effective if their good/service is demand inelastic) or they would just decrease the supply of that good or service to maintain their profit margin. Which will shift SRAS to the left.
• A stronger pound(appreciation) will lead to a decrease in the price of imports. This means it will be cheaper to imports goods from other countries as a result they more goods for the or imports the same amount of good at a cheaper price. If the increase their imports then SRAS will also increase.

Question 4

Changes in tax rates

Answer 4

The main type of taxation that affects SRAS is corporation tax, as this leads to an increase in the costs of production for firms within the economy and which will decrease their profits assuming that their revenue also stays the same. As a result they csn either increase the price to increase thei demand(this will only be effective if their goood/service is demand inelatsic) or they would just decrease the supply of that good or service to maintain their profit margin. Which will shift SRAS to the left.