short run aggregate supply Flashcards
what is aggregate supply?
Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time
draw short run AS curve
diagram analysis
Diagram analysis
The SRAS curve is upward-sloping due to two reasons
The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward-sloping
As real output increases, firms have to spend more to increase production e.g. wage bills will increase
Increased costs result in higher average prices
what causes a movement along the supply curve?
Whenever there is a change in the average price level (AP) in an economy,
draw SRAS diagram movement along the curve
Diagram analysis
An increase in the AP (ceteris paribus) from AP1 → AP2 leads to a movement along the SRAS curve from A → B
There is an expansion of real GDP from Y1 → Y2
A decrease in the AP (ceteris paribus) from AP1 → AP3 leads to a movement along the SRAS curve from A → C
There is a contraction of real GDP (output) from Y1→Y3
factors that causes the entire SRAS curve to shift
Shifts in SRAS are caused by changes in conditions of supply in an economy; this usually means changes in the costs of production
Changes in the cost of raw materials and energy
Changes in exchange rates (E/R)
Changes in tax rates
shift in the SRAS diagram
diagram analysis
The shift of the entire short-run aggregate supply (SRAS) curve is due to a change in one of the determinants of aggregate supply
Diagram analysis
A decrease in costs or increase in productivity results in a shift right of the entire curve from SRAS1 → SRAS2
At every price level, output and real GDP have increased from Y1 → Y2
An increase in costs or decrease in productivity results in a shift left of the entire curve from SRAS1 → SRAS3
At every price level, output and real GDP have decreased from Y1 → Y3
what are the conditions of supply
costs of production or productivity changes
what causes the SRAS curve to shift
Whenever there is a change in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve
what are the factors that influence SRAS?
Changes in costs of raw materials and energy
Changes in wage rates
Changes in tax rates
what influences on SRAS
-Increase in the cost of raw materials and energy
-Decrease in costs of raw materials/energy
-Increase in wage rates
-Decreases in wage rates
-Decreases in tax rates
-Increase in tax rates
what would happen if there is an decrease in wage rates SRAS?
Decrease in wages decreases the cost of production
Lower costs = higher output
SRAS Increases - curve shifts right
What happens when there is an increase in wage rates ?
Increases in wages increases the cost of production
Higher costs = lower output
SRAS decreases - curve shifts Left
what happens when there is a decrease in costs of raw materials / energy ?SRAS
As the price of input costs decrease, more goods/services can be produced with the same amount of money
SRAS increases - curve shifts right
what happens when there is an increase in the cost of raw materials and energy ?
As the price of input costs rises, fewer goods and services can be produced with the same amount of money
SRAS decreases - curve shifts left
what happens when there is a decrease in tax rates ? SRAS
Taxes represent an additional cost for firms
Decreasing taxes = decrease in costs
Lower costs = more output
SRAS increases - curve shifts right
