Short-run Aggregate Supply (SRAS)

Definition

Short-run Aggregate Supply (SRAS) refers to the total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in the short run. In the short run, some prices are sticky, meaning they do not adjust immediately to changes in economic conditions, which can lead to a positive relationship between the price level and the quantity of output supplied. This concept plays a crucial role in understanding inflation, unemployment, and the effects of fiscal policy.

5 Must Know Facts For Your Next Test

1. SRAS is upward sloping due to the sticky nature of certain prices and wages in the short run, which means that as prices rise, firms are incentivized to increase production.
2. Factors that can shift the SRAS curve include changes in resource prices, supply shocks, and government regulations affecting production costs.
3. In the short run, increases in aggregate demand can lead to higher output and lower unemployment, but also potentially result in inflation if demand outpaces supply.
4. The SRAS curve can intersect with the Aggregate Demand curve at multiple points, indicating different equilibrium levels of output and price depending on economic conditions.
5. Policymakers can influence SRAS through fiscal measures such as subsidies or taxes aimed at reducing production costs for firms.

Review Questions

• How does the concept of Short-run Aggregate Supply explain the relationship between price levels and output in an economy experiencing inflation?
  • Short-run Aggregate Supply illustrates that in the short run, as price levels increase, firms are willing to produce more goods and services due to sticky wages and prices. This positive relationship means that during inflationary periods, where overall prices rise, firms may respond by ramping up production to take advantage of higher prices. However, this can lead to an increased risk of demand outpacing supply, ultimately pushing inflation even higher.
• Evaluate how a negative supply shock would affect the Short-run Aggregate Supply curve and overall economic conditions.
  • A negative supply shock, such as a sudden increase in oil prices or natural disasters affecting production capabilities, would shift the Short-run Aggregate Supply curve to the left. This leftward shift indicates a decrease in the quantity of goods and services supplied at every price level. As a result, this would likely lead to higher prices (cost-push inflation) and reduced output, worsening economic conditions such as increasing unemployment while simultaneously raising inflation.
• Assess the implications of fiscal policy on Short-run Aggregate Supply and how it interacts with Aggregate Demand during an economic downturn.
  • Fiscal policy can significantly impact Short-run Aggregate Supply by influencing production costs and business investment. For instance, if the government implements tax cuts or increases spending on infrastructure projects, it may lower production costs or enhance productivity for businesses. This can shift the SRAS curve to the right, increasing output and potentially lowering unemployment. Simultaneously, if these fiscal measures boost Aggregate Demand during an economic downturn, they could create a balanced recovery by raising both supply and demand levels without overly increasing inflation.

Related terms

Long-run Aggregate Supply (LRAS): Long-run Aggregate Supply (LRAS) represents the total quantity of goods and services that can be produced when the economy is at full employment and all resources are used efficiently.

Aggregate Demand (AD): Aggregate Demand (AD) is the total quantity of goods and services demanded across all levels of the economy at a given price level, influenced by factors such as consumer spending, investment, government spending, and net exports.

Inflationary Gap:

An Inflationary Gap occurs when the actual output in an economy exceeds its potential output at full employment, typically leading to upward pressure on prices.