SRAS Curve

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 illustrates how producers will respond to changes in the price level while holding certain inputs constant.

5 Must Know Facts For Your Next Test

1. The SRAS curve is upward-sloping, indicating that producers will supply more output as the price level rises, holding other factors constant.
2. The slope of the SRAS curve is determined by the degree of price stickiness in the economy, with a steeper slope reflecting greater price rigidity.
3. Shifts in the SRAS curve are caused by changes in the costs of production, such as wages, raw materials, or productivity, which affect the quantity of output supplied at a given price level.
4. The SRAS curve plays a crucial role in the AD/AS model, as it interacts with the Aggregate Demand (AD) curve to determine the equilibrium price level and real output.
5. Movements along the SRAS curve are associated with changes in the price level, while shifts in the SRAS curve are associated with changes in the quantity of output supplied.

Review Questions

• Explain how the SRAS curve relates to the concept of short-run equilibrium in the AD/AS model.
  • The SRAS curve represents the short-run relationship between the price level and the quantity of real output supplied. In the AD/AS model, the intersection of the AD and SRAS curves determines the short-run equilibrium price level and real output. This equilibrium point reflects the level of output that producers are willing to supply given the current price level, while also satisfying the quantity of goods and services demanded by consumers, businesses, and the government.
• Describe how changes in production costs can affect the position of the SRAS curve and the implications for inflation and unemployment.
  • Shifts in the SRAS curve are caused by changes in the costs of production, such as wages, raw materials, or productivity. If production costs increase, the SRAS curve will shift to the left, indicating that producers are willing to supply less output at each price level. This shift can lead to a higher price level (inflation) and a lower level of real output (higher unemployment), as the economy moves to a new equilibrium point. Conversely, a decrease in production costs will shift the SRAS curve to the right, resulting in a lower price level and higher real output.
• Evaluate the role of the SRAS curve in understanding the relationship between economic growth, unemployment, and inflation within the AD/AS framework.
  • The SRAS curve is a crucial component of the AD/AS model, as it helps explain the dynamic relationships between economic growth, unemployment, and inflation. In the short run, movements along the upward-sloping SRAS curve demonstrate how changes in the price level affect the quantity of output supplied, which in turn impacts employment and economic growth. Shifts in the SRAS curve, driven by changes in production costs, can lead to a tradeoff between inflation and unemployment, as the economy adjusts to a new equilibrium. Understanding the SRAS curve and its interactions with the AD curve is essential for policymakers to implement effective stabilization policies aimed at promoting economic stability and growth while managing inflation and unemployment.

Related terms

Aggregate Supply: The total quantity of goods and services that firms are willing to sell at different price levels in a given time period.

Aggregate Demand: The total quantity of goods and services that buyers are willing and able to purchase at different price levels in a given time period.

Equilibrium Price Level: The price level at which the quantity of goods and services demanded equals the quantity supplied, representing a point of balance in the market.