Short run aggregate supply curve

The short run aggregate supply curve (SRAS) is a graphical representation of how the overall price level of goods and services in an economy responds to changes in the total output of goods and services. It plots the total output of goods and services at various price levels, showing how the output level changes when prices increase or decrease. This graph allows managers to make decisions on how to maximize the output of goods and services without sacrificing price stability. It also serves as an important tool in macroeconomic policy-making, helping to identify the factors that cause output and prices to fluctuate.

Example of short run aggregate supply curve

• The short run aggregate supply curve (SRAS) is a useful tool for determining the price level of an economy in the short run. For example, when the demand for goods and services increases and output is at its full capacity, the SRAS curve will slope upwards because the increased demand will cause prices to rise as companies seek to maximize their profits. Similarly, when the demand for goods and services decreases and output is below its full capacity, the SRAS curve will slope downwards because the decrease in demand will cause prices to decrease as companies seek to reduce their losses.
• The SRAS can also be used to analyze the impact of changes in the cost of production on price levels. If the cost of inputs such as labor and materials increases, the SRAS will shift to the left as companies are forced to raise their prices in order to remain profitable. On the other hand, if the cost of inputs decreases, the SRAS will shift to the right as companies are able to lower their prices in order to remain competitive.
• The SRAS is also a useful tool for predicting the impact of changes in the money supply on the economy. If the money supply increases, the SRAS will shift to the right as the increased money supply leads to an increase in demand, which will cause prices to rise. Conversely, if the money supply decreases, the SRAS will shift to the left as the decreased money supply leads to a decrease in demand, which will cause prices to fall.
• Finally, the SRAS can also be used to analyze the impact of changes in taxation on price levels. If taxes increase, the SRAS will shift to the left as companies are forced to raise their prices in order to cover the increased cost of production. On the other hand, if taxes decrease, the SRAS will shift to the right as companies are able to lower their prices in order to remain competitive.

Formula of short run aggregate supply curve

The formula for the short run aggregate supply curve (SRAS) is typically expressed as a linear equation in terms of price and output. The formula takes the following form:

$$\text{SRAS}= a + b(P) $$

where a is the intercept term and b is the slope or elasticity of the curve. The intercept term, a, shows the level of output in the economy when the price level is zero. The slope, b, shows the change in output when the price level changes by one unit.

In the linear equation, P is the price level, which is expressed as the ratio of a given price in the current period to the average price in the base period. The base period is usually set to be the previous year or the previous quarter.

The SRAS equation can also be expressed in terms of the aggregate supply (AS) curve, which is the graphical representation of the SRAS equation. The equation is expressed as follows:

$$\text{AS}= \frac{Y}{P} $$

where Y is the total output of goods and services in the economy and P is the price level.

The AS curve is a line with a negative slope, which shows that as the price level increases, the total output of goods and services decreases. This is because when the price level is high, firms will produce fewer goods and services due to lower profit margins. On the other hand, when the price level is low, firms will produce more goods and services, leading to higher output.

When to use short run aggregate supply curve

The short run aggregate supply curve (SRAS) can be used in a number of situations, including:

• Analyzing the effectiveness of fiscal and monetary policies: SRAS helps to identify the factors that cause output and prices to fluctuate in response to changes in government policies.
• Evaluating the impact of external shocks: SRAS helps to understand how external shocks, such as changes in global demand or supply, can affect the economy.
• Analyzing the effects of changes in technology or productivity: SRAS can be used to understand how changes in technology or productivity can lead to changes in the price level of goods and services.
• Determining the optimal output and price levels for firms: SRAS can be used to determine the optimal output and price levels for individual firms.
• Determining the impact of changes in aggregate demand: SRAS can be used to understand how changes in aggregate demand can affect the overall price level of goods and services in the economy.

Types of short run aggregate supply curve

The short run aggregate supply curve (SRAS) is a graphical representation of how the overall price level of goods and services in an economy responds to changes in the total output of goods and services. There are three main types of SRAS curves: the classical, Keynesian, and vertical SRAS curves.

• The classical SRAS curve shows how the economy behaves in the short run and is based on the assumption that prices adjust quickly to changes in output. It is upward-sloping, meaning that an increase in output leads to an increase in the price level.
• The Keynesian SRAS curve shows how the economy behaves in the short run when prices do not adjust quickly to changes in output. This curve is downward-sloping, meaning that an increase in output leads to a decrease in the price level.
• The vertical SRAS curve is based on the assumption that prices do not adjust to changes in output in the short run. This curve is vertical, meaning that an increase in output does not lead to any change in the price level.

Advantages of short run aggregate supply curve

The short run aggregate supply curve (SRAS) provides many advantages in macroeconomic policy-making. These include:

• Increased price stability: The SRAS helps to identify the factors that cause output and prices to fluctuate, allowing managers to make decisions on how to maximize the output of goods and services without sacrificing price stability.
• Improved forecasting: The SRAS allows for more accurate forecasting of future price levels and output levels, enabling more accurate predictions about the state of the economy.
• Increased efficiency in policy-making: By examining the SRAS, policymakers can develop more effective policies that are tailored to the specific needs of the economy.
• Improved economic performance: By understanding the dynamics of the SRAS, policymakers can develop policies that are better suited to achieving their desired economic outcomes.
• Easier identification of macroeconomic trends: The SRAS can help to identify macroeconomic trends, allowing for more accurate economic analysis and policy-making.

Limitations of short run aggregate supply curve

The short run aggregate supply curve is a useful tool for macroeconomic policy-making, but it has some limitations. These include:

• It does not take into account the long-term effects of policy decisions. For example, changes in the money supply or fiscal policy may have an immediate effect on aggregate supply, but their long-term effects on price stability are not accounted for.
• It does not consider the effects of expectations and other psychological factors on supply and demand. Expectations, in particular, can have a major impact on prices, but this is not taken into account in the SRAS.
• It does not consider the effects of supply shocks, such as natural disasters or unexpected changes in the availability of resources. These can have a significant effect on aggregate supply and should be taken into account when analyzing economic conditions.
• It does not take into account the effects of technological progress. Technological progress can have a major effect on the supply of goods and services, but this is not taken into account in the SRAS.
• It does not consider the effects of government policies on aggregate demand and supply. Government policies, such as taxes and subsidies, can have a significant effect on the output and prices of goods and services, but this is not taken into account in the SRAS.

Short run aggregate supply curve — recommended articles

Supply curve — Change In Supply — Baumol model — Demand curve shift — Law of supply and demand — Cyclic variation — Competitive equilibrium — Supply shock — Inelastic supply

References

• Nevile, J. W. (1992). Notes on Keynes’ aggregate supply curve. Journal of Post Keynesian Economics, 15(2), 255-260.