Aggregate Supply: SRAS, Vertical LRAS, and Self-Correction

Objectives

• Students will be able to explain the sticky-wage and misperceptions theories of why SRAS slopes upward.
• Students will be able to distinguish determinants that shift SRAS (input prices, productivity, supply shocks, business taxes) from those that shift LRAS (labor force, capital stock, technology).
• Students will be able to draw the self-correction process from both a recessionary gap (SRAS shifts right) and an inflationary gap (SRAS shifts left).
• Students will be able to identify stagflation from a leftward SRAS shift and explain why demand-side policy cannot fix output and inflation at once.
• Students will be able to explain why LRAS is vertical at potential output.

Materials (all free, no student accounts needed)

• Aggregate Supply module
• AD-AS sandbox graph
• Trace-the-Shock walkthroughs
• Draw-the-graph FRQ practice
• Aggregate Supply question set

Five-minute warm-up, no prep

Open one of these on the projector. Students say what they think happens to price and quantity before anything moves, lock it in, and then the graph plays out step by step. No accounts, nothing graded or stored.

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Warm-up (8 min)

• Bell-ringer: 'A factory owner's selling prices rose 10% this quarter, but her workers' wages are fixed by a contract signed six months ago. What happens to her profit per unit, and will she produce more or less?' Two minutes, then cold-call two.
• Show of hands: is a spike in oil prices a demand-side or a supply-side event? Do not correct yet; return to it in direct instruction.

Direct instruction (28 min)

• Draw SRAS upward-sloping and narrate both AP explanations: sticky wages (a three-year auto union contract) and misperceptions (the wheat farmer who mistakes general inflation for a rise in her own price).
• Build a two-column board: LEFT shifts SRAS (oil and input prices, productivity, supply shocks, business taxes and regulation), RIGHT shifts LRAS (labor force, capital stock, technology, institutions). Sort eight events, one student each.
• Draw LRAS vertical at potential output and use the doubling thought experiment: if every price and wage doubled overnight, the same workers and machines produce the same output.
• Walk the worked example: price level 110 and Y $5T on LRAS, then an oil shock moves SRAS left to price level 120 and Y $4.6T. Name it: a $400B recessionary gap and stagflation at once.
• Trace self-correction: with Y below potential, unemployment above the natural rate pushes wages down, SRAS drifts back right, output returns to $5T at a lower price level. Stress it is slow and only SRAS moves.

Guided practice (32 min)

• Open /graph-walkthroughs and project 'Adverse Supply Shock and the Stagflation Dilemma.' Step through it as a class, pausing at the policy-dilemma step to ask why boosting AD makes inflation worse.
• Switch to /sandbox/adas, give the oil-shock scenario, and call a student to drag SRAS left; the class reads off price level up, real GDP down, and names the gap.
• Same graph, new student: an economy in a recessionary gap self-corrects. Have them drag SRAS right and confirm output returns to LRAS at a lower price level.
• Move to /frq-practice/draw and assign 'Oil Price Shock,' 'Economy-Wide Wage Hike,' and 'Long-Run Growth.' Students draw on devices while the tool checks curve and direction; circulate to catch anyone shifting LRAS for a temporary shock.
• Cold-call the trap: 'A drought destroys farmland permanently. Which curves move?' (both SRAS and LRAS left). Have a student defend why LRAS moves here but not for an oil embargo.

Independent practice (27 min)

• Students run the /practice/aggregate-supply set on their own, aiming for at least 8 correct items.
• Free-response: an economy starts in long-run equilibrium and a hurricane destroys refineries, raising input costs. (a) Draw and label the short-run effect, (b) state the gap, (c) explain in two sentences why the Fed cannot fix both output and inflation with one move.

Exit ticket

• State one of the two AP explanations for why SRAS slopes upward.
• Sort these into SRAS-shifter or LRAS-shifter: a rise in oil prices, a permanent jump in the capital stock, a new business tax.
• Draw the arrow: from an inflationary gap, which way does SRAS move to self-correct, and what happens to the price level?

Homework

• Read through the Aggregate Supply module on /macro/aggregate-supply and finish the practice set embedded in it.
• Complete the two self-correction walkthroughs on /graph-walkthroughs (negative and positive demand shocks) and write one sentence on what moves in each.

Differentiation

• For early finishers: assign the combined-shift item (SRAS left and AD right at once) and have them state which variable is ambiguous and which is definite.
• For students who confuse the two supply curves: give a pre-sorted example bank and have them add three new events to the correct column rather than build it from scratch.
• For a self-correction scaffold: provide the four-step sequence (gap, wage change, SRAS shift, new equilibrium) as sentence stems to complete.

Misconceptions to head off

• Belief: a change in the price level shifts SRAS. Correction: the price level moves the economy along SRAS; only cost-side changes (input prices, productivity, taxes) shift the curve.
• Belief: LRAS shifts when AD or the price level changes. Correction: LRAS is vertical at potential output and moves only when resources, capital, or technology change.
• Belief: stagflation can come from an AD shift. Correction: AD moves output and prices the same direction; only a leftward SRAS shift raises prices while cutting output.
• Belief: any oil-price shock shifts LRAS. Correction: a temporary shock moves SRAS only; LRAS shifts just when productive capacity is permanently changed.