Determinants of short-run aggregate supply Flashcards
What are the main determinants of Short-Run Aggregate Supply (SRAS)?
The primary determinants of SRAS are the price level and production costs. Changes in production costs affect firms’ willingness and ability to supply goods and services at different price levels, thus shifting the SRAS curve.
In exams: Emphasize that SRAS can shift due to changes in costs related to wages, raw materials, taxes, and productivity.
What is Short-Run Aggregate Supply (SRAS)?
Short-Run Aggregate Supply (SRAS) refers to the total quantity of goods and services that firms in an economy are willing and able to produce at a given overall price level in the short run, where at least one factor of production (e.g., capital) is fixed.
Key exam point: In the short run, SRAS is upward-sloping, meaning that as prices increase, output increases because firms are incentivized by higher profits.
What are the 5 main costs of production (Supply side shocks)
1) Wages
2) Raw materials/Commodity prices
3) Oil Prices
4) Business Taxes
5) Import Prices
How do changes in money wage rates affect SRAS
Higher wage rates increase production costs for firms, leading to a leftward shift in SRAS as firms are less willing to produce the same output at previous price levels. Conversely, lower wage rates decrease costs, shifting SRAS to the right as firms can afford to supply more.
Example for exams: Wage increases in a specific sector, such as manufacturing, can reduce SRAS across the economy if costs rise broadly.
How do changes in raw material prices affect SRAS?
Increases in raw material prices (e.g., oil or steel) raise production costs, causing the SRAS curve to shift leftward. Decreases in raw material prices lower costs, allowing firms to produce more at any price level, shifting SRAS rightward.
Example: A surge in oil prices increases costs for transportation and manufacturing industries, reducing SRAS by raising firms’ overall costs.
What impact does business taxation have on SRAS?
Increases in business taxes (e.g., corporate tax or VAT) raise production costs, leading to a leftward shift in SRAS. Tax cuts reduce costs, shifting SRAS rightward by encouraging firms to produce more at each price level.
Exam tip: Link the impact of business taxes to profitability, showing how higher taxes reduce firms’ willingness to supply due to lower net profits.
How does productivity influence SRAS?
Higher productivity means that firms can produce more output with the same input, effectively lowering per-unit production costs and shifting SRAS to the right. Lower productivity increases costs, shifting SRAS leftward as firms face higher costs per unit of output.
Example for answers: Investment in new technology or worker training can boost productivity, increasing SRAS by enabling more efficient production.
What causes the SRAS curve to shift to the left?
The SRAS curve shifts left due to rising production costs, such as:
-Increased wage rates
-Higher raw material prices
-Increased business taxes
-Decline in productivity
In exams: Show that these factors reduce output at each price level by making production more costly.
What causes the SRAS curve to shift to the right?
The SRAS curve shifts to the right when production costs decrease or productivity increases. Key factors include:
-Decreased wage rates
-Falling raw material prices
-Reduction in business taxes
-Increases in productivity (e.g., through technological advances)
Key exam point: Explain how these changes lower production costs, enabling firms to supply more output at each price level.
