Short-Run Aggregate Supply

Definition

Short-run aggregate supply (SRAS) refers to the relationship between the quantity of real output supplied by firms and the overall price level in the economy, in the short-term. It reflects the willingness and ability of producers to sell their goods and services at different price levels, given the constraints they face in the short run.

5 Must Know Facts For Your Next Test

1. The short-run aggregate supply curve is typically upward-sloping, reflecting the law of diminishing returns and the fact that producers are willing to supply more output at higher prices.
2. In the short run, firms can increase output by increasing the variable factors of production, such as labor, while holding the fixed factors, like capital, constant.
3. Factors that can shift the short-run aggregate supply curve include changes in input prices, changes in productivity, and changes in the number of firms in the market.
4. The short-run aggregate supply curve is distinct from the long-run aggregate supply curve, which is vertical and represents the economy's full-employment level of output.
5. Understanding the behavior of the short-run aggregate supply curve is crucial for analyzing the effects of changes in aggregate demand on the overall price level and real output in the economy.

Review Questions

• Explain how the short-run aggregate supply curve is derived and how it differs from the long-run aggregate supply curve.
  • The short-run aggregate supply curve is derived from the production function, which shows the relationship between the quantity of inputs (such as labor and capital) and the quantity of output produced. In the short run, firms can only increase output by increasing variable inputs like labor, while holding fixed inputs like capital constant. This leads to the upward-sloping short-run aggregate supply curve, which reflects the law of diminishing returns. In contrast, the long-run aggregate supply curve is vertical, representing the economy's full-employment level of output, where all prices and wages are fully flexible.
• Describe the factors that can shift the short-run aggregate supply curve and explain how these shifts can affect the overall price level and real output in the economy.
  • Factors that can shift the short-run aggregate supply curve include changes in input prices (such as wages or the cost of raw materials), changes in productivity (due to technological advancements or improvements in efficiency), and changes in the number of firms in the market. An increase in short-run aggregate supply, caused by a shift to the right of the SRAS curve, will lead to a lower price level and higher real output in the economy. Conversely, a decrease in short-run aggregate supply, caused by a shift to the left of the SRAS curve, will result in a higher price level and lower real output. Understanding these dynamics is crucial for policymakers and economists when analyzing the impact of various economic shocks on the overall economy.
• Evaluate the role of the short-run aggregate supply curve in the Keynesian and neoclassical models of aggregate demand and aggregate supply, and explain how the differences in these models can lead to different policy prescriptions.
  • In the Keynesian model, the short-run aggregate supply curve is relatively flat, reflecting the idea that firms are willing to supply more output at higher prices due to nominal rigidities in the economy. This allows changes in aggregate demand to have a significant impact on real output in the short run. In contrast, the neoclassical model assumes that the short-run aggregate supply curve is steeper, reflecting the view that prices and wages are more flexible. As a result, changes in aggregate demand have a smaller impact on real output and a larger impact on the overall price level. These differences in the underlying assumptions of the Keynesian and neoclassical models can lead to different policy prescriptions, with the Keynesian model favoring more active fiscal and monetary policies to stabilize the economy, while the neoclassical model tends to emphasize the importance of maintaining price stability and allowing the economy to adjust naturally to shocks.

Related terms

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

Aggregate Supply: The total supply of all goods and services in an economy at a given price level and time.

Long-Run Aggregate Supply: The level of output an economy can produce when all prices, including wages, are fully flexible.