Short-Run Aggregate Supply

Definition

Short-run aggregate supply (SRAS) refers to the relationship between the quantity of real output supplied and the general price level in the economy, in the short-term time frame. It represents the willingness and ability of producers to sell their products at different price levels, considering the constraints and conditions they face in the short run.

5 Must Know Facts For Your Next Test

1. In the short run, firms can only increase output by increasing the use of variable inputs, such as labor, while the quantities of fixed inputs, like capital, remain unchanged.
2. The short-run aggregate supply curve is upward-sloping, indicating that as the price level rises, the quantity of real output supplied increases.
3. The slope of the short-run aggregate supply curve is determined by the degree of wage and price stickiness in the economy.
4. 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.
5. The short-run aggregate supply curve plays a crucial role in the AD-AS model, which is used to analyze the macroeconomic effects of changes in aggregate demand and aggregate supply.

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 based on the assumption that firms can only increase output by increasing the use of variable inputs, such as labor, while the quantities of fixed inputs, like capital, remain unchanged. This means that in the short run, firms face diminishing returns to the variable input, leading to an upward-sloping SRAS curve. In contrast, the long-run aggregate supply curve is vertical, reflecting the economy's ability to produce at its full potential output when all factors of production can be adjusted.
• Describe the factors that can cause shifts in the short-run aggregate supply curve and how these shifts affect the equilibrium price level and output.
  • 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. For example, an increase in input prices, such as wages or the cost of raw materials, would cause the SRAS curve to shift leftward, leading to a higher price level and lower real output at the new equilibrium. Conversely, an increase in productivity would shift the SRAS curve rightward, resulting in a lower price level and higher real output. These shifts in the SRAS curve are crucial in the AD-AS model for understanding changes in macroeconomic variables like growth, unemployment, and inflation.
• Analyze how the short-run aggregate supply curve is incorporated into the AD-AS model and explain its role in determining the equilibrium price level and output.
  • The short-run aggregate supply curve is a key component of the AD-AS model, which is used to analyze the macroeconomic effects of changes in aggregate demand and aggregate supply. In the AD-AS model, the SRAS curve, along with the aggregate demand curve, determines the equilibrium price level and real output. Specifically, the intersection of the AD and SRAS curves defines the short-run equilibrium, where the quantity of real output demanded equals the quantity of real output supplied. Changes in either aggregate demand or short-run aggregate supply will lead to a new equilibrium, with different levels of price and output. Understanding the behavior of the SRAS curve is crucial for policymakers to effectively manage the economy and address issues like growth, unemployment, and inflation.

Related terms

Aggregate Supply: Aggregate supply is the total quantity of goods and services that firms are willing to sell at different price levels in an economy.

Long-Run Aggregate Supply: Long-run aggregate supply (LRAS) represents the quantity of real output that the economy can produce at full employment, when all factor inputs are being utilized to their fullest extent.

Sticky Wages: Sticky wages refer to the phenomenon where wages are slow to adjust to changes in economic conditions, often remaining fixed in the short run despite changes in the price level.