Aggregate Supply
Aggregate Supply: Total planned quan.ty of output of goods and services that businesses
within an economy are willing and able to supply at general price level at a given .me.
Simplified: Total output produced in economy
Spare Capacity is high – SRAS is elas.c.
- Rise in AD is met easily with increased output.
- NO THREAT OF INFLATION
Short- run Aggregate Supply:
The rela.onship between the planned na.onal output (GDP) and the general price level.
(Assume produc.vity, costs of produc.on and state of technology is constant in SHORT RUN
THESE FACTORS SHIFT SRAS)) – CETRUS PARABUS
If price level increases – EXPANSION of SRAS.
Price level increases due to: Increase in AD
If price level decreases – CONTRACTION of SRAS.
Price Level Increases due to: Decrease in AD
Factors Influencing SRAS (shi:s):
SRAS is determined by costs of produc>on in the economy.
(Also labour produc.vity and Supply side shocks)
If costs of produc.on Increase – Sras shiTs LeT.
If costs of produc.on Decreases – Sras shiTs Right.
Cost of Produc.on: (affec.ng all firms – MACRO level)
1) Wages
, If Wages Increase – Costs of Produc.on increase – SRAS shiTs leT. (vice versa)
2) Raw Material/Commodity Prices
If Raw material price increase – costs of produc.on rises – Sras shiTs to leT (vice Versa)
3) Oil Price
Oil is used in transporta.on/ in produc.on – if oil prices increase – increase costs of
produc.on – SRAS shiTs leT.
4) Business Taxes (VAT)
If VAT increases – cost of produc.on increase – Sras shiTs LeT.
5) Import Priced (SPICED/WPIDEC)
Firms import many of their produc.on materials.
Import prices change due to exchange rate.
Strong pound – Imports cheaper – drop in costs of produc.on – Sras shiTs LeT.
Labour Produc>vity: Efficiency of output per person If labour produc.vity rises – Increase in
output – SRAS shiTs right.
SUPPLY SIDE SHOCKS – Unexpected events that distributes short term produc.on.
e.g Hurricane, tsunami, poli.cal crisis etc.
If SRAS shiTs due to Supply Side shocks
Can be -ve supply side shocks – SRAS shiTs leT.
Or +ve Supple Side Shocks – SRAS shiTs right.
SRAS Chains of reasonings:
Example (1): Rise in Business Taxes on SRAS (25 Marker)
One example of a business tax is the introduc.on of a carbon tax set at £50 per tonne of c02
emiaed (FROM CASE STUDY).
A tax will increase the costs for producers for example a power company now faces
increased costs of supplying energy to na.onal grid (APPLICATION TO EXAMPLE).
Assuming other costs stay the same (ceterus Parbus), a carbon tax leads to an increase in
unit costs across the economy. (A03 – link to costs of produc.on)
This will create an inward shiT of SRAS. (A03 – What actually happens to SRAS)
The extent of the shiT depends on how much carbon is emiaed by individual businesses and
the economy. (A04)
If there is a switch to cleaner energy and less pollu.ng the carbon tax will have a lower
impact on SRAS. (Applica.on of A04)
Example (2): How an apprecia>on of a currency can impact SRAS (15 Marker)
A currency apprecia.on means one currency can but more of the other for example if the
pound appreciates from £1 - $1.2, to £1 - $1.4. (Defini.on + Applica.on)
Aggregate Supply: Total planned quan.ty of output of goods and services that businesses
within an economy are willing and able to supply at general price level at a given .me.
Simplified: Total output produced in economy
Spare Capacity is high – SRAS is elas.c.
- Rise in AD is met easily with increased output.
- NO THREAT OF INFLATION
Short- run Aggregate Supply:
The rela.onship between the planned na.onal output (GDP) and the general price level.
(Assume produc.vity, costs of produc.on and state of technology is constant in SHORT RUN
THESE FACTORS SHIFT SRAS)) – CETRUS PARABUS
If price level increases – EXPANSION of SRAS.
Price level increases due to: Increase in AD
If price level decreases – CONTRACTION of SRAS.
Price Level Increases due to: Decrease in AD
Factors Influencing SRAS (shi:s):
SRAS is determined by costs of produc>on in the economy.
(Also labour produc.vity and Supply side shocks)
If costs of produc.on Increase – Sras shiTs LeT.
If costs of produc.on Decreases – Sras shiTs Right.
Cost of Produc.on: (affec.ng all firms – MACRO level)
1) Wages
, If Wages Increase – Costs of Produc.on increase – SRAS shiTs leT. (vice versa)
2) Raw Material/Commodity Prices
If Raw material price increase – costs of produc.on rises – Sras shiTs to leT (vice Versa)
3) Oil Price
Oil is used in transporta.on/ in produc.on – if oil prices increase – increase costs of
produc.on – SRAS shiTs leT.
4) Business Taxes (VAT)
If VAT increases – cost of produc.on increase – Sras shiTs LeT.
5) Import Priced (SPICED/WPIDEC)
Firms import many of their produc.on materials.
Import prices change due to exchange rate.
Strong pound – Imports cheaper – drop in costs of produc.on – Sras shiTs LeT.
Labour Produc>vity: Efficiency of output per person If labour produc.vity rises – Increase in
output – SRAS shiTs right.
SUPPLY SIDE SHOCKS – Unexpected events that distributes short term produc.on.
e.g Hurricane, tsunami, poli.cal crisis etc.
If SRAS shiTs due to Supply Side shocks
Can be -ve supply side shocks – SRAS shiTs leT.
Or +ve Supple Side Shocks – SRAS shiTs right.
SRAS Chains of reasonings:
Example (1): Rise in Business Taxes on SRAS (25 Marker)
One example of a business tax is the introduc.on of a carbon tax set at £50 per tonne of c02
emiaed (FROM CASE STUDY).
A tax will increase the costs for producers for example a power company now faces
increased costs of supplying energy to na.onal grid (APPLICATION TO EXAMPLE).
Assuming other costs stay the same (ceterus Parbus), a carbon tax leads to an increase in
unit costs across the economy. (A03 – link to costs of produc.on)
This will create an inward shiT of SRAS. (A03 – What actually happens to SRAS)
The extent of the shiT depends on how much carbon is emiaed by individual businesses and
the economy. (A04)
If there is a switch to cleaner energy and less pollu.ng the carbon tax will have a lower
impact on SRAS. (Applica.on of A04)
Example (2): How an apprecia>on of a currency can impact SRAS (15 Marker)
A currency apprecia.on means one currency can but more of the other for example if the
pound appreciates from £1 - $1.2, to £1 - $1.4. (Defini.on + Applica.on)
