Short-run aggregate supply (SRAS)

Definition

Short-run aggregate supply (SRAS) refers to the total quantity of goods and services that firms are willing and able to produce at a given overall price level in the short run, while holding some input prices constant. In this context, SRAS is important because it reflects how production levels can respond to changes in demand when prices are sticky or inflexible. The SRAS curve typically slopes upward, indicating that as the price level rises, the quantity of goods and services supplied increases, given fixed costs and production constraints in the short run.

5 Must Know Facts For Your Next Test

1. The SRAS curve is upward sloping because as prices increase, businesses can cover their higher production costs and are incentivized to produce more.
2. Short-run aggregate supply can shift due to changes in production costs, such as wages or raw materials, which affect firms' willingness to supply goods.
3. In the short run, an economy can experience output above its potential output due to increased demand, but this may lead to inflationary pressures.
4. The position of the SRAS curve can be influenced by expectations about future inflation, which affects wage-setting behavior among firms.
5. Supply shocks, such as natural disasters or sudden changes in oil prices, can cause shifts in the SRAS curve, impacting overall economic output.

Review Questions

• How does the upward slope of the SRAS curve relate to the behavior of firms when overall price levels change?
  • The upward slope of the SRAS curve indicates that as overall price levels increase, firms are incentivized to produce more goods and services because they can cover higher production costs. This response is due to price stickiness; while some input prices remain constant in the short run, higher prices for final products allow firms to increase output profitably. Thus, a rise in the price level leads to an increase in the quantity of goods supplied as businesses react to the potential for greater profits.
• Discuss how shifts in the SRAS curve can impact overall economic output and inflation.
  • Shifts in the SRAS curve can significantly affect both economic output and inflation levels. For example, if production costs rise due to increased wages or raw material prices, the SRAS curve will shift leftward. This shift results in decreased output at any given price level, potentially leading to higher inflation as firms pass on their increased costs to consumers. Conversely, if there is a decrease in production costs, the SRAS may shift rightward, allowing for increased output without triggering inflation.
• Evaluate the implications of price stickiness on short-run aggregate supply and overall economic stability.
  • Price stickiness complicates the relationship between short-run aggregate supply and economic stability by delaying adjustments to changes in demand. When prices do not adjust quickly, economies can face periods of excess demand or supply, leading to either inflation or unemployment. This mismatch creates challenges for policymakers trying to stabilize the economy. In situations where demand increases but prices are sticky downwards, firms may not be able to adjust output quickly enough, resulting in shortages and upward pressure on prices. Understanding these dynamics is crucial for managing economic fluctuations effectively.

Related terms

Aggregate Demand (AD): The total demand for all goods and services in an economy at a given price level and in a given period.

Long-Run Aggregate Supply (LRAS):

The total quantity of goods and services that can be produced when all input prices are flexible, reflecting full employment and the economy's productive capacity.

Price Stickiness: The phenomenon where prices of goods and services do not adjust immediately to changes in economic conditions, often leading to temporary imbalances in supply and demand.