Short-run aggregate supply

Definition

Short-run aggregate supply (SRAS) refers to the total production of goods and services that firms in an economy are willing and able to produce at a given price level, holding some input prices constant. In the short run, producers can adjust output based on demand changes, but not all factors of production can be easily modified, leading to a relationship between the price level and real output that can differ from long-run conditions.

5 Must Know Facts For Your Next Test

1. In the short run, the SRAS curve slopes upwards, indicating that as the price level rises, the quantity of goods and services supplied increases due to higher profit margins.
2. Factors such as changes in production costs, wages, or resource availability can shift the SRAS curve to the left or right.
3. The concept of SRAS is crucial in understanding how economies react to demand shocks and policy changes in the short term.
4. In contrast to the long-run aggregate supply, where all resources can be adjusted, SRAS reflects a temporary state influenced by fixed costs and resources.
5. The intersection of the SRAS curve with aggregate demand determines the short-run equilibrium price level and output.

Review Questions

• How does the short-run aggregate supply curve respond to changes in demand within the economy?
  • The short-run aggregate supply curve responds to changes in demand by shifting along its upward slope. When aggregate demand increases, firms experience higher prices for their products and can increase production in response. This leads to a higher quantity of goods and services supplied at a higher price level. Conversely, if aggregate demand decreases, firms may cut back on production due to lower prices, causing a movement down along the SRAS curve.
• Discuss how shifts in input prices affect the short-run aggregate supply curve.
  • Shifts in input prices have a direct impact on the short-run aggregate supply curve. If input prices rise, such as wages or raw material costs, it becomes more expensive for firms to produce goods. This typically results in a leftward shift of the SRAS curve, leading to a decrease in the quantity supplied at any given price level. On the other hand, if input prices fall, it can shift the SRAS curve to the right, allowing firms to supply more at existing price levels.
• Evaluate the implications of short-run aggregate supply on economic policy decisions during periods of recession or inflation.
  • During periods of recession, policymakers may focus on stimulating aggregate demand through monetary or fiscal policies to encourage economic growth. Understanding short-run aggregate supply is crucial since increasing demand can lead to higher output and employment without triggering inflation immediately. Conversely, during inflationary periods, if aggregate demand rises too much relative to SRAS, it may lead to a further increase in price levels. Policymakers must balance these dynamics carefully to avoid worsening inflation while trying to spur economic activity.

Related terms

Aggregate Demand: The total quantity of goods and services demanded across all levels of the economy at a given price level.

Long-run Aggregate Supply: The total production of goods and services that an economy can produce when both labor and capital are fully flexible, resulting in an output level that is consistent with full employment.

Price Level: The average level of prices in the economy, often measured using indices like the Consumer Price Index (CPI) or the GDP deflator.