Short-Run Aggregate Supply (SRAS)

Definition

The Short-Run Aggregate Supply (SRAS) curve represents the relationship between the quantity of real output supplied and the price level in the short-run, when at least one factor of production is fixed. It shows how producers will respond to changes in the price level, given the constraints of their existing production capacity and technology.

5 Must Know Facts For Your Next Test

1. The SRAS curve is upward-sloping, indicating that as the price level rises, the quantity of real output supplied increases, and vice versa.
2. The upward slope of the SRAS curve is due to the presence of at least one fixed factor of production, such as capital or land, which limits the ability of firms to increase output in the short-run.
3. Factors that can shift the SRAS curve include changes in input prices, changes in productivity, and changes in the number of firms in the market.
4. The SRAS curve is more elastic (flatter) when there is more slack in the economy, such as during a recession, and more inelastic (steeper) when the economy is operating near full capacity.
5. The SRAS curve, along with the Aggregate Demand (AD) curve, is used to analyze the short-run equilibrium in the economy and the effects of changes in aggregate demand or aggregate supply on output, employment, and the price level.

Review Questions

• Explain the relationship between the price level and the quantity of real output supplied in the short-run, as depicted by the SRAS curve.
  • The SRAS curve shows that as the price level rises, the quantity of real output supplied increases. This is because in the short-run, at least one factor of production is fixed, such as capital or land. As the price level increases, firms are willing to produce more output because the higher prices make it more profitable to do so, even with the constraints of their existing production capacity. Conversely, as the price level falls, the quantity of real output supplied decreases, as firms are less willing to produce at the lower prices.
• Describe how changes in input prices, productivity, and the number of firms in the market can shift the SRAS curve.
  • Changes in input prices, productivity, and the number of firms in the market can all shift the SRAS curve. If input prices, such as wages or the cost of raw materials, increase, the SRAS curve will shift to the left, indicating that firms are willing to supply less real output at each price level. Conversely, if input prices decrease, the SRAS curve will shift to the right. Increases in productivity, which allow firms to produce more output with the same level of inputs, will shift the SRAS curve to the right. Finally, changes in the number of firms in the market can also affect the SRAS curve, as more firms entering the market will increase the quantity of real output supplied at each price level, shifting the SRAS curve to the right.
• Analyze how the elasticity of the SRAS curve can change based on the state of the economy, and explain the implications for the effects of changes in aggregate demand or aggregate supply.
  • The elasticity of the SRAS curve can vary based on the state of the economy. When there is more slack in the economy, such as during a recession, the SRAS curve is more elastic (flatter), meaning that a change in the price level will lead to a larger change in the quantity of real output supplied. This is because firms have more unused capacity and resources, allowing them to more easily increase or decrease production in response to price changes. Conversely, when the economy is operating near full capacity, the SRAS curve is more inelastic (steeper), meaning that a change in the price level will lead to a smaller change in the quantity of real output supplied. This is because firms have less unused capacity and resources, limiting their ability to respond to price changes. The elasticity of the SRAS curve has important implications for the effects of changes in aggregate demand or aggregate supply on output, employment, and the price level in the short-run.

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.

Aggregate Demand:

Aggregate demand is the total quantity of goods and services that consumers, businesses, governments, and foreign buyers are willing to buy at different price levels in an economy.

Long-Run Aggregate Supply (LRAS): The Long-Run Aggregate Supply (LRAS) curve represents the relationship between the quantity of real output supplied and the price level in the long-run, when all factors of production can be varied.