Short Run Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

The total amount of real output (goods and services) produced in an economy in a year at different price levels

Question 2

What is the short-run in macroeconomics?

Answer 2

The period of time when all resource prices (wages, etc.) are constant

Question 3

Why are wages often rigid (in the short run)?

Answer 3

1. Labour contracts fix wage rates
2. Workers and labour unions resist wage cuts
3. Wage cuts have negative effects on worker morale, causing firms to avoid them

Question 4

What does the short-run aggregate supply curve (SRAS) demonstrate?

Answer 4

Short-run aggregate supply curve (SRAS) shows the relationship between the price level and the quantity of real output (real GDP) produced by firms when resource prices (especially wages) are fixed

Question 5

What are the movements along the SRAS curve?

Answer 5

1. As price level increases, output produced increases

2. As price level decreases, output produced decreases

Question 6

Why is the SRAS curve upward sloping?

Answer 6

1. Firm profitability
   - Due to unchanging resource prices, if the price level increases the firm will gain more profit by increasing their output
2. Sticky wages
   - As firms cannot reduce wages (due to unchanging resource prices in short run), if the price level decreases, the firm will have to reduce output sold to cut down on costs

Question 7

What are the 4 causes of change in SRAS (i.e. 4 reasons for SRAS to shift)?

Answer 7

Factors causing changes in costs of production:

1. Changes in wages
   - higher wages => decrease in SRAS
   - lower wages => increase in SRAS
2. Change in non-labour resource prices
   - increase in the price of oil, equipment, capital goods, etc. => decrease in SRAS
   - vice versa
3. Changes in business taxes or subsidies
   - increase in business taxes => decrease in SRAS
4. Supply Shocks
   - such as war, unfavorable weather conditions