Short-Run Aggregate Supply

Specification Coverage: Edexcel unit 2.3.2 - Short-Run Aggregate Supply. Students should be able to understand and explain what SRAS is, why the SRAS curve slopes upward, the causes of shifts in SRAS, and how changes in production costs affect the level of output firms are willing to supply. These notes also cover cost-push shocks and their effect on output and the price level.

The SRAS Curve: A Recap

Definition: Short-run aggregate supply is the total planned output of goods and services in an economy at a given price level, assuming that at least one factor of production, such as capital or technology, is fixed.

The SRAS curve is upward sloping because, in the short run, higher output leads to higher unit costs, such as overtime wages. Firms therefore need a higher price to make additional production worthwhile.

Short-run aggregate supply sloping upward, as a higher price level draws out more output while costs are fixed — Figure 1: Movements along the SRAS curve, showing how a higher price level leads to a higher quantity of real GDP supplied in the short run.

Shifts in the SRAS Curve

A shift of the entire SRAS curve is caused by a change in the costs of production for firms across the economy.

This changes the level of output firms are willing to supply at every given price level.

Short-run aggregate supply shifting right as production costs fall, raising real output and lowering the price level — Figure 2: A shift of the SRAS curve to the right (SRAS1 to SRAS2) due to a decrease in production costs.

A leftward shift is the origin of cost-push inflation. When production costs rise across the economy, SRAS shifts left, and the result is a higher price level together with lower real output. A cost-push shock is a sudden version of the same thing, such as a sharp rise in oil prices.

Key Factors Influencing SRAS

Factor	Impact on SRAS
Cost of Raw Materials or Energy	A fall in the cost of raw materials or energy reduces production costs, shifting SRAS to the right. A rise in costs shifts SRAS to the left.
Labour Costs	A fall in labour costs reduces production costs, shifting SRAS to the right. A rise in labour costs shifts SRAS to the left.
Exchange Rates	A depreciation of the domestic currency makes imported raw materials more expensive, raising production costs and shifting SRAS to the left. An appreciation has the opposite effect.
Indirect Taxes	An increase in indirect taxes raises production costs, shifting SRAS to the left. A decrease in indirect taxes lowers production costs, shifting SRAS to the right.
Subsidies	Government subsidies can lower production costs, shifting SRAS to the right. The removal of subsidies can raise costs, shifting SRAS to the left.
Supply Shocks	Unexpected events, such as natural disasters or sudden changes in oil prices, can affect production costs and shift SRAS. A negative supply shock shifts SRAS to the left, while a positive supply shock shifts it to the right.

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Eight original multiple-choice questions on the factors that shift SRAS — costs, wages, exchange rates, taxes, subsidies and supply shocks.

Practice Questions: 2.3.2 Short-Run Aggregate Supply

Past paper questions on this topic

One question on Short-Run Aggregate Supply from the Edexcel A-Level papers, 2017, worth 25 marks. It links straight to the page of the official mark scheme where its answer begins.

Past Paper Questions: 2.3.2 Short-Run Aggregate Supply