Short-Run Aggregate Supply vs Determinants of Aggregate Supply
Short-Run Aggregate Supply and Determinants of Aggregate Supply are two Aggregate Demand & Supply concepts in AP Economics that students often mix up. Short-run aggregate supply is the total supply of goods and services at different price levels, holding factor costs and resource prices constant. The determinants of aggregate supply are non-price factors, input prices, productivity, taxes/subsidies on producers, and expectations, that shift the SRAS curve. Here is how they compare side by side.
In the short run, an increase in the price level leads to an increase in the quantity of goods and services supplied. This is because firms can earn higher profits by producing more when prices are higher. The SRAS curve is upward sloping.
SRAS shifts when something other than the price level changes firms' per-unit production costs. Falling input/resource prices (e.g., cheaper oil or lower nominal wages) and rising productivity shift SRAS right, lowering the price level and raising output; supply shocks like a spike in energy prices shift it left, causing cost-push inflation. Business taxes and regulation also shift SRAS, while changes that raise the economy's productive capacity shift both SRAS and LRAS. Distinguish a shift of SRAS (a determinant changed) from a movement along it (the price level changed).
Moving Along SRAS vs Shifting It: What the Price Level Does and What Costs Do
| Short-Run Aggregate Supply (the curve) | Determinants of Aggregate Supply | |
|---|---|---|
| What the term names | The upward sloping relation between the price level and real output supplied | The non-price factors that reposition that whole relation |
| What sets it off | A change in the price level of output | Input prices, productivity, taxes and subsidies on producers, supply shocks, expectations |
| Wording a grader accepts | A change in quantity of real output supplied | An increase or decrease in short-run aggregate supply |
| What you draw | A new point on the same curve | A second curve to the left or right |
| What is being held constant | Nominal wages and other input prices | Nothing, since those are exactly what change |
| Role of the price level | It is the cause of the movement | It is a result, since a leftward shift raises it while lowering output |
| Connection to the long run | The slope disappears once input prices catch up | A permanent productivity or resource change moves the long-run curve as well |
A wage increase does not move you along the curve, it redraws it
This is the error worth drilling. Wages are an input price, and input prices are held constant when the curve is drawn, so a change in wages cannot be a movement along it. Work an illustrative case. Aggregate demand and short-run aggregate supply cross at 600 billion dollars of output with the price index at 100. Now a wage settlement and dearer imported inputs raise production costs across industries. At the old price level of 100, firms are only willing to supply 580 billion dollars, so the whole curve moves left by 20 billion dollars. The economy does not stop there, because the leftward shift creates a shortage at the old price level and the price level is bid up. As the price index climbs to 104, firms move up the new curve to 588 billion dollars, while buyers move back along aggregate demand from 600 to the same 588. The new equilibrium is 588 billion dollars at a price index of 104: less output and a higher price level, which is the standard supply shock result. Both movements are visible at /sandbox/adas.
Some determinants hit only the short-run curve, and some move potential output too
Sorting the determinants by which curve they touch is what separates a solid answer from a vague one. A temporary jolt to input prices, a poor harvest, a strike, a spike in the cost of imported energy, moves short-run aggregate supply and leaves the long-run curve where it was, because the country's stock of workers, capital and know-how is unchanged. Once the shock passes or contracts reset, the short-run curve drifts back. A change in productive capacity is different. More capital, a larger labor force, better technology, or institutions that make production more efficient raise the output an economy can sustain at full employment, so both curves move right and stay there. Business taxes and subsidies sit in between, since they alter costs immediately and can also alter the incentive to invest over time. The practical test for an exam is to ask whether the change would still matter once every wage and price had adjusted. If it would, potential output moved. If not, only the short-run curve did. The supply side is developed at /macro/aggregate-supply.
Frequently asked questions
Does a higher price level shift short-run aggregate supply?
No, a change in the price level produces a movement along the SRAS curve rather than a shift of it, because the price level is the variable the curve is plotted against. Only non-price determinants such as input prices, productivity or producer taxes shift the curve. Calling a price level change a shift is one of the most costly errors on a macro free-response question.
What shifts the SRAS curve?
Short-run aggregate supply shifts when input prices change, when productivity changes, when taxes or subsidies on producers change, when a supply shock hits, or when firms' expectations about future prices change. Anything that alters the cost of producing at a given price level moves the curve. Higher costs shift it left and lower costs shift it right.
Do the determinants of aggregate supply also shift LRAS?
Only those that change the economy's productive capacity, such as more capital, a larger or better trained workforce, or improved technology, shift long-run aggregate supply as well as the short-run curve. Temporary cost shocks move only the short-run curve, since they leave resources and technology untouched. Ask whether the change would still bind after every wage and price had adjusted.
Live AD/AS Model graph. Drag the curves, or open the full version.
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