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Revision Notes

Home / IB / Economics / SL / Revision Notes / 3. Macroeconomics / 3.2 Variations in Economic Activity (AD & AS) / 3.2.2 Short-Run Aggregate Supply (SRAS)


3.2.2 Short-Run Aggregate Supply (SRAS)


The SRAS Curve

  • Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time
  • The short run is a period in which wages and other factor prices are inflexible
  • The long run is a period in which there is full wage and factor price flexibility 

2-3-1-aggregate-supply

A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy

  • The AS 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

A Movement Along the SRAS Curve

  • 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
     

77ro3X16_2-3-1-aggregate-supply---movement-along-sras

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 the quantity supplied

 

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
      • Y is the symbol used in macroeconomics to denote national income or real GDP
  • 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 of the Entire SRAS Curve

  • Whenever there is a change in the non-price determinants of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve

2-3-1-aggregate-supply---shift-in-sras

A shift in the entire short run aggregate supply (SRAS) curve occurs due to a change in one of the non-price determinants of 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

The Non-price Determinants of the SRAS Curve

  • There are two main factors that can influence the short-run aggregate supply (SRAS). They are
    • Changes in costs of raw materials and energy
    • Changes in indirect taxes

Explaining the Influences on Short-run Aggregate Supply (SRAS)

Change in Condition
Explanation Impact on SRAS

Changes to the costs of raw materials/energy



  • As the price of input costs rise, fewer goods/services can be produced with the same amount of money

SRAS decreases - shifts left

  • As the price of input costs decrease, more goods/services can be produced with the same amount of money

  • Factors which influence the input costs include wage rates, interest rates, government regulation and exchange rates

SRAS increases - shifts right

Changes in indirect taxes




  • Indirect taxes represent an additional cost for firms
  • Decreasing taxes =  decrease in costs
    Lower costs = more output

SRAS increases - shifts right

  • Increasing taxes =  increase in costs
    Higher costs = less output

SRAS decreases - shifts left



  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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