3.6 SRAS Flashcards
What is short-run aggregate supply (SRAS)?
A graphical model that shows the positive relationship between the aggregate price level and amount of aggregate output supplied in an economy.
What is a short-run in macroeconomics?
A period in which the price of at least one factor of production cannot change.
What are sticky prices or wages?
Prices and wages that are not fully flexible and cannot completely respond to changes such as inflation or deflation.
What are menu costs?
The idea that firms might not change their prices when there is a change in the price level because it is costly to do so.
What are the determinants of SRAS?
Anything that will shift the SRAS curve, also called an aggregate supply shock; if the prices of any of the factors of production change, or firms expect those prices to change, then the SRAS curve will shift.
What are expectations?
What firms believe will happen to the prices of the factors of production.
Why does the SRAS curve slope upwards?
The SRAS curve slopes upwards, showing the positive relationship between the price level and output. It slopes up for four possible reasons: sticky input prices (like wages), sticky output prices (also called “menu costs”), worker misperceptions, and imperfect information within firms.
What is sticky input prices?
Economists agree that prices are sticky (at least in the short run) because wages are usually set for long time periods and businesses might lock themselves into long-term purchase agreements for other resources.
What is sticky output prices?
Firms might not change their prices when there is a change in the price level because it is costly to do so (such as printing new menus that reflect the higher prices), and customers get annoyed by constantly changing prices. Firms tend to set their sticky prices relatively high to incentivize firms to supply a lot.
What is worker misperceptions?
This explanation relates to those sectors where wages are not sticky. Workers are not as well-informed about the economy as firms, and they struggle to appreciate the impact of inflation on their real wage. They may work extra hard and produce more output if they mistakenly think they are getting a real pay rise.
What is imperfect information within firms?
This explanation assumes that workers and firms both have imperfect information. Firms do not recognize inflation in the overall economy and they get confused about real changes to their costs and prices. They may increase their output if they wrongly believe that the price of their own products are rising in real terms.
What is the effect of aggregation?
Many firms will change their prices in response to inflation in the overall economy, and the effect of aggregation of all of these firms’ actions is what creates the SRAS curve.
