Short Run Aggregate Supply (SRAS)

• AS is the relationship between real output and the price level

The Classical Model of Aggregate • SRAS shows how much output the economy can produce in the
short term at each price level
Supply 2018 • A rise in the price level should stimulate an expansion of supply
• We hold the following constant in the short run:
– Wage rates for labour
– Other resource prices such as raw material prices etc

Short Run Aggregate Supply Curve Short Run Aggregate Supply Curve
Price Level
(SRAS) SRAS1 Price Level
(SRAS) SRAS1

A rise in the general price

P2 P2 level will cause an
Short run aggregate
expansion of aggregate
supply (SRAS)
supply in the economy
shows total output
P1 P1 Producers are responding
when prices can
to higher prices by
change but the prices
producing more.
of all factor inputs e.g.
Real national output will
wage rates are held
increase from Y1 to Y2
constant

Y1 Y2 Real National Output Y1 Y2 RNO

 Shifts in short run aggregate supply Inward Shift in Short Run Aggregate Supply
(SRAS) Price Level
SRAS2

SRAS1
• Shifts in the AS curve can be caused by the following
factors
• Changes in unit labour costs P2
– (unit labour costs are defined as wage costs adjusted for the level of productivity)

• Changes to raw material costs and other components

– For example fluctuations in the world price of oil, copper, aluminum and other
essential inputs in many production processes
– These costs might be affected by movements in the exchange rate which causes
fluctuations in the prices of imported goods and services

• Changes to producer taxes and subsidies levied by the

government as part of their fiscal policy
Y2 Y1 RNO

Inward Shift in Short Run Aggregate Supply

Outward Shift in Short Run Aggregate Supply
SRAS2
Price Level Price Level
SRAS1 SRAS1

SRAS3

P2 P2

Y2 Y1 RNO Y1 Y3 RNO
Outward Shift in Short Run Aggregate Supply Long Run Aggregate Supply (LRAS)
Price Level
SRAS1

SRAS3
• LRAS is located at potential GDP – it
P2
represents a maximum level of real national
output in the economy
• Potential GDP is determined by the quantity
and quality of Factors of Production
– Technology does not change
– All resources are fully employed
– The economy is on its production possibilities curve
Y1 Y3 RNO

Long Run Aggregate Supply (LRAS)

LRAS
Price Level
Changes in potential GDP are brought about by:

•Changes in labour supply

•Changes in the stock of capital inputs
•Changes in the productivity of factor inputs
This shows the maximum potential
output the economy can produce with •Advances in the state of technology
given resources

An outward shift of LRAS signifies an increase in long-run potential

“full-employment” output (Same as shift outwards in PPC)

Y2 RNO
An Increase in Long Run Aggregate Supply Policies to increase the productive potential of
LRAS1 LRAS2 LRAS3 A PERMANENT the economy
Price Level INCREASE IN
AGGREGATE These policies are known as Supply-Side Policies
SUPPLY
An outward shift of
•Changes to the structure of taxation (to increase incentives to work
long run aggregate harder)
supply shows an
increase in potential
•Measures to make markets competitive
GDP •Active labour market policies to increase the supply and efficiency of
This allows the labour
economy to operate at
a higher level of •Improvements in education and training
equilibrium GDP
•Policies to increase spending on R&D and stimulate investment
•Privatisation of state owned industries
•Improvements in the banking system to enable finance higher levels
RNO
of investment.