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SRAS

Short-Run
Aggregate Supply

Understand why prices and output move together in the short run, what shifts the SRAS curve, and how it shapes real GDP and the price level.

AP Macroeconomics

What Is Aggregate Supply?

Aggregate supply represents the total quantity of goods and services that all firms in an economy are willing and able to produce at each possible price level.

Short Run
Some input prices (especially wages) are sticky: they adjust slowly to changes in the overall price level.
Long Run
All input prices fully adjust. Output is determined by resources and technology, not the price level.

The SRAS Curve

Price Level (PL) Real GDP (Y) SRAS \(Y_1\) \(PL_1\)

Why Does SRAS Slope Upward?

Sticky-Wage Theory
Nominal wages are locked by contracts. When the price level rises, real wages fall, making it cheaper to hire, so output rises.
Sticky-Price Theory
Some firms are slow to adjust menu prices. A higher price level means their relative prices are low, boosting demand for their goods.
Misperceptions Theory
Firms temporarily confuse a rise in the general price level with a rise in their own product's relative price, and increase output.

The SRAS Relationship

The short-run aggregate supply relationship can be expressed as:

1
\(Y\): Actual real GDP (short-run output).
2
\(Y_N\): Natural level of output (potential GDP at full employment).
3
\(\alpha\): A positive constant showing output sensitivity to price surprises.
4
\(PL - PL_e\): The gap between the actual price level and the expected price level.

SRAS in the AD-AS Model

Price Level Real GDP LRAS SRAS AD E \(PL^*\) \(Y_N\)

What Shifts the SRAS?

A change in the price level causes movement along the SRAS. A change in production costs or supply conditions shifts the entire curve.

1
Input prices: wages, raw materials, energy. Higher costs shift SRAS left.
2
Productivity / Technology: Improvements lower per-unit costs, shifting SRAS right.
3
Business taxes and subsidies: Higher taxes raise costs (left shift); subsidies lower them (right shift).
4
Government regulation: More regulation raises compliance costs, shifting SRAS left.
5
Inflationary expectations: If workers expect higher prices, they demand higher wages, shifting SRAS left.

Visualizing SRAS Shifts

Price Level Real GDP SRAS₀ SRAS₁ SRAS₂ Decrease Increase
Decrease (Left)
Higher input costs, new regulations, or rising inflationary expectations shift SRAS left.
Increase (Right)
Lower input costs, technological advances, or subsidies shift SRAS right.

SRAS vs LRAS

SRAS LRAS
Slope Upward-sloping Vertical
Input Prices Some are sticky (fixed) All fully flexible
Output Determined By Price level + costs Resources + technology
Key Time Frame Weeks to a few years Several years+
Output Level Can differ from \(Y_N\) Always at \(Y_N\)

How to Analyze an SRAS Shift

1
Identify the shock: Does the event change production costs or supply conditions?
2
Determine direction: Does it raise per-unit costs (left shift) or lower them (right shift)?
3
Draw the new SRAS: Shift the curve horizontally; the slope stays the same.
4
Find new equilibrium: Where the new SRAS crosses AD gives the new price level and real GDP.
5
Compare to \(Y_N\): Is the economy now in a recessionary gap, inflationary gap, or at full employment?

Example: Oil Price Shock

A major oil-producing region faces conflict, causing oil prices to double. Oil is a key input for most industries.

Price Level Real GDP SRAS₀ SRAS₁ AD E₀ E₁ \(PL_1\) \(Y_1\)

Example: Technology Boom

A breakthrough in automation technology allows firms across the economy to produce the same output with 20% fewer labor hours.

Price Level Real GDP SRAS₀ SRAS₁ AD E₀ E₁ \(PL_1\) \(Y_1\)

Stagflation vs Demand-Pull Inflation

Both cause the price level to rise, but the effect on real GDP is opposite. Knowing which curve shifted tells you the cause.

Stagflation
SRAS shifts left. Price level rises, real GDP falls. Caused by supply shocks (e.g., oil crisis).
Demand-Pull Inflation
AD shifts right. Price level rises, real GDP rises too. Caused by increased spending (e.g., fiscal stimulus).

Output Gaps and SRAS

Recessionary Gap
\(Y < Y_N\): actual output is below potential. Unemployment exceeds the natural rate. Over time, wages fall and SRAS shifts right.
Inflationary Gap
\(Y > Y_N\): actual output is above potential. Unemployment is below the natural rate. Over time, wages rise and SRAS shifts left.

Common Mistakes

✕ Confusing Movement vs Shift
A change in the price level moves along SRAS. Only changes in production costs shift the curve.
✕ Mixing Up SRAS and LRAS Shifts
A change in technology or resources shifts both SRAS and LRAS. A change in input prices alone shifts only SRAS.
✕ Forgetting Self-Correction
In the long run, SRAS adjusts to close output gaps. Don't assume the economy stays stuck in a gap forever.

SRAS Shift Summary

Event SRAS Direction PL Real GDP
Oil prices rise Left Rises Falls
New technology Right Falls Rises
Higher wages Left Rises Falls
Government subsidy Right Falls Rises
Higher business taxes Left Rises Falls
Higher expected inflation Left Rises Falls

Question 1 of 5

Which of the following would cause the SRAS curve to shift to the left?

Question 2 of 5

Stagflation is characterized by a rising price level and falling real GDP. In the AD-AS model, stagflation results from:

Question 3 of 5

If actual output \(Y\) is greater than potential output \(Y_N\), the economy has an inflationary gap. In the long run, how does the economy self-correct?

Question 4 of 5

A major improvement in production technology reduces per-unit costs across the economy. What happens to the price level and real GDP in the short run?

Question 5 of 5

Which of the following correctly explains why the SRAS curve slopes upward?