Short-Run Aggregate Supply
What is Short-Run Aggregate Supply?
Short-run aggregate supply is the total supply of goods and services at different price levels, holding factor costs and resource prices constant.
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.
Short-Run Aggregate Supply: a worked example
A chair factory signs a two year wage contract at $20 per hour, and each worker finishes four chairs an hour, so labor costs $5 per chair. Materials and overhead add $35, and the chair sells for $50, leaving $10 of profit. Now the economy wide price level rises ten percent. The chair fetches $55, but the wage contract and standing input orders are locked, so unit cost stays $40 and profit jumps to $15, a fifty percent gain. The factory adds a shift and weekly output climbs from 600 to 780 chairs. Only firms holding locked costs and spare capacity react, so the economy wide move is far smaller than this one factory's: real GDP supplied rises from $840 billion to $880 billion as the price index goes from 100 to 110, which is the upward sloping SRAS. When the contract expires the wage resets to $22 and materials to $38.50, so unit cost returns to $44, profit is $11, the margin is back to a fifth of the sale price, and output falls back to 600.
The mistake students make with short-run aggregate supply
After an increase in aggregate demand raises the price level, many students immediately shift SRAS left in the same step, reasoning that costs went up. The instinct comes from a real mechanism, but it belongs to the long run adjustment, not to the first move. Within the short run, nominal wages and contracted input prices are fixed, which is exactly why SRAS slopes upward instead of standing vertical. A change in the price level alone is a movement along SRAS. Draw the second curve only once the question carries the economy into the long run.
Short-Run Aggregate Supply questions
Why is the short-run aggregate supply curve upward sloping?
Sticky input prices create the slope. Nominal wages set by contract, rents, and prices already agreed with suppliers do not move immediately when output prices do. When the price level rises and those costs stay put, the profit margin on each unit widens, so firms hire more hours and raise output. When the price level falls while wages remain fixed, margins compress and firms cut production. The result is a positive relationship between the price level and real output in the short run.
What shifts the short-run aggregate supply curve?
Four categories move SRAS: nominal wage changes, other input prices such as energy and raw materials, productivity or technology changes, and government actions like business taxes, subsidies, and regulation. Expected inflation belongs here too, because workers who expect prices to climb bargain for higher wages today. Anything that raises the cost of producing each unit at every price level pushes SRAS left, and anything that lowers unit costs pushes it right.
What is the difference between SRAS and LRAS?
SRAS slopes upward because input prices lag output prices, so a higher price level can temporarily push real output above its sustainable level and a lower one can push it below. LRAS stands vertical at full employment output, since once every wage and input price has adjusted, real output depends on labor, capital, resources, and technology rather than on the price level. A demand increase moves an economy up along SRAS in the short run but leaves LRAS untouched.
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