Aggregate Supply (SRAS) Curve

Definition

The Aggregate Supply (SRAS) Curve represents the total quantity of goods and services that firms in an economy are willing and able to produce at different price levels in the short run. It reflects how production can vary with price changes, while input prices remain sticky in the short term, which can lead to a positive relationship between price levels and output.

5 Must Know Facts For Your Next Test

1. The SRAS curve is upward sloping, indicating that as prices increase, producers are willing to supply more goods and services due to higher potential profits.
2. In the short run, input prices such as wages may be fixed or slow to adjust, leading to a positive relationship between price levels and the quantity of output supplied.
3. Economic shocks, like sudden increases in demand or changes in resource prices, can shift the SRAS curve left or right, impacting short-run output and price levels.
4. The intersection of the SRAS and Aggregate Demand curves determines the short-run equilibrium output and price level in an economy.
5. In the long run, the economy self-adjusts as wages and input prices eventually rise or fall, leading to shifts from SRAS towards LRAS.

Review Questions

• How does the SRAS curve respond to changes in aggregate demand, and what implications does this have for short-run equilibrium?
  • When aggregate demand increases, it shifts rightward, leading to higher prices and increased output along the SRAS curve. This means that producers respond to higher demand by increasing production due to the potential for greater profits. Conversely, if aggregate demand decreases, it shifts leftward, causing a drop in both prices and output. This interaction shapes the short-run equilibrium, where output and price levels are established based on the current intersection of these curves.
• Evaluate how sticky input prices affect the behavior of the SRAS curve and its implications for economic fluctuations.
  • Sticky input prices create a lag in how quickly wages and other costs adjust to changes in demand or price levels. This stickiness results in a positive slope for the SRAS curve; when demand rises, firms can increase production without immediately facing higher costs. As a result, this dynamic can lead to economic fluctuations where periods of rapid growth are followed by inflationary pressures when costs eventually catch up with rising prices.
• Analyze how self-adjustment in the economy influences shifts in the SRAS curve over time and its relationship with long-run economic growth.
  • Self-adjustment refers to how economies respond to shocks and changes over time. Initially, when there are shocks that shift the SRAS curve, such as supply disruptions or sudden demand changes, the economy might experience increased volatility. However, as wages and input prices adjust upwards or downwards based on these changes, the SRAS curve will shift towards long-run equilibrium. This process emphasizes that while short-run fluctuations can significantly impact output and pricing, they ultimately lead back toward stable growth represented by the Long-Run Aggregate Supply (LRAS).

Related terms

Aggregate Demand: The total quantity of goods and services demanded across all levels of the economy at a given overall price level.

Short-Run Equilibrium:

The point at which the quantity of aggregate demand equals the quantity of aggregate supply, determining the actual output and price level in the short run.

Long-Run Aggregate Supply (LRAS):

The total output that an economy can produce when utilizing all resources efficiently, which is vertical at the natural level of output.