Short-run Aggregate Supply (SRAS) (AQA A Level Economics)

• Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time

Diagram: Short-run Aggregate Supply (SRAS) Curve

The SRAS is upward-sloping. As price levels rise, firms are incentivised to supply more 

Diagram analysis

• The SRAS curve is upward-sloping due to two reasons
• The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward-sloping
• As real output increases, firms have to spend more to increase production e.g. wage bills will increase
• Increased costs result in higher average prices

• Whenever there is a change in the average price level (AP) in an economy, there is a movement along the short-run aggregate supply (SRAS) curve
  

Diagram: A Movement Along the SRAS Curve

An increase or decrease in the average price level (AP) causes a movement along the short-run aggregate supply (SRAS) curve, leading to a contraction or expansion of SRAS

Diagram analysis

• An increase in the AP (ceteris paribus) from AP₁ → AP₂ leads to a movement along the SRAS curve from A → B
  • There is an expansion of real GDP from Y₁ → Y₂
    
    
• A decrease in the AP (ceteris paribus) from AP₁ → AP₃ leads to a movement along the SRAS curve from A → C
  • There is a contraction of real GDP (output) from Y₁→Y₃

• Shifts in SRAS are caused by changes in conditions of supply in an economy; this usually means changes in the costs of production
  • • Changes in the cost of raw materials and energy
    • Changes in exchange rates (E/R)
    • Changes in tax rates

Diagram: A Shift in the SRAS Curve

The shift of the entire short-run aggregate supply (SRAS) curve is due to a change in one of the determinants of aggregate supply

Diagram analysis

• A decrease in costs or increase in productivity results in a shift right of the entire curve from SRAS₁ → SRAS₂
  • At every price level, output and real GDP have increased from Y₁ → Y₂
    
    
• An increase in costs or decrease in productivity results in a shift left of the entire curve from SRAS₁ → SRAS₃
  • At every price level, output and real GDP have decreased from Y₁ → Y₃

• Whenever there is a change in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve
• There are multiple factors that can influence the short-run aggregate supply (SRAS). These include:
  • Changes in costs of raw materials and energy
  • Changes in wage rates
  • Changes in tax rates
     

The Influences on Short-Run Aggregate Supply (SRAS)

Factor	Explanation	Impact on SRAS
Increase in the cost of raw materials and energy	As the price of input costs rises, fewer goods and services can be produced with the same amount of money	SRAS decreases - curve shifts left
Decrease in costs of raw materials/energy	As the price of input costs decrease, more goods/services can be produced with the same amount of money	SRAS increases - curve shifts right
Increase in wage rates	Increases in wages increases the cost of production  Higher costs = lower output	SRAS decreases - curve shifts Left
Decrease in wage rates	Decrease in wages decreases the cost of production  Lower costs = higher output	SRAS Increases - curve shifts right
Decrease in tax rates	Taxes represent an additional cost for firms Decreasing taxes = decrease in costs Lower costs = more output	SRAS increases - curve shifts right
Increase in tax rates	Taxes represent an additional cost for firms Increasing taxes = increase in costs Higher costs = less output	SRAS decreases - curve shifts left