2.3.2 Short-run AS

Question 1

Causes of shifts in the SRAS curve

Answer 1

Unit wage costs
Labour productivity
Raw material and commodity prices ( oil )
Business indirect taxes ( VAT )
Import prices ( affected by movements in a country’s exchange rate + fluctuations in global prices )
Other supply shocks e.g. a hurricane , impact of drought , flooding or a political crisis ( impact of a lockdown because of a public health crisis during a pandemic )

Question 2

Supply - side shocks

Answer 2

Supply - side shocks affect short run aggregate supply and can also affect a country’s long - run productive potential . Occur when there are any changes in the factors that caused the SRAS to shift , e.g. changes in raw materials and energy, exchange rates and tax .

Question 3

What are some examples of supply side shocks?

Answer 3

• Steep rise in oil and gas prices or other commodities used in production
• Political turmoil / civil unrest / major strikes
• Supply shut - downs caused by a public health crisis
• Natural disasters causing a sharp fall in production
• Unexpected breakthroughs in production technology ( example of favourable supply shock )
• Level of net migration
• Import tariffs

Question 4

How do changes in costs of raw materials and energy shift SRAS?

Answer 4

Increase production costs , shifting the SRAS curve left . Businesses only produce at the new price level if prices rise . Oil prices significantly determine the level of SRAS , as they affect all businesses .

Question 5

How do changes in exchange rates shift SRAS?

Answer 5

A weaker pound increases import prices , decreasing SRAS as production becomes more expensive . Conversely , a stronger pound reduces import costs , increasing SRAS . The UK’s heavy reliance on imports makes exchange rate fluctuations crucial , as seen in the post - Brexit inflation caused by a weaker pound ( cost - push inflation ) .

Question 6

How do changes in tax rates shift SRAS?

Answer 6

Taxes increase the cost of production and thus they cause a fall in SRAS , shifting it to the left . Subsidies shift it the curve right as they decrease costs .

Question 7

Why are the factors of short run AS important to consider when changing prices in reaction to a fall of demand?

Answer 7

Short run AS is likely to be elastic (i.e. output changes by a bigger percentage than price). An increase in output by firms leads to an increase in costs which leads to a rise in prices as they pass these costs onto consumers. However, because the factor prices are constant, the increase in prices will be relatively small. If demand falls, firms might attempt to lower prices to stimulate sales, but the reduction in prices will be limited or small. This is because, in the short run, firms face fixed factor prices and are reluctant to lay off workers, which prevents significant cost reductions and limits their ability to lower prices substantially.