15 – Aggregate Supply

Short run aggregate supply (SRAS)

Short-run aggregate supply curve (SRAS)
shows how much output firms would be
prepared to supply in the short run at any
given overall price level.
The SRAS curve is the summation of all of
the individual supply curves of the producers
in an economy.

Activity
1. Explain what is meant by the short run
2. State the law of supply
3. Explain why the supply curve is upward sloping
 Short run aggregate supply (SRAS)
Any change in the average
price level will result in a
corresponding movement
along the SRAS curve
 Short run aggregate supply (SRAS)
Any change in a non price
factor will result in a shift in
the SRAS curve.
These are referred to as
“supply side shocks”

Activity
Research 4 examples of supply side shocks
Explain how each supply side shock will affect the SRAS curve
Extension
Research one example of each of these shocks that have
occurred in a country of your choice
 Long run aggregate supply (LRAS)
There is a debate in economics about the shape of the long run aggregate
supply curve.

Activity
1. Explain what is meant by the long
run
2. Explain what Adam Smith meant by
the ‘invisible hand’
3. Explain what John Maynard Keynes
meant by ‘fiscal policy’
 Long run aggregate supply (LRAS)
The new classical approach to LRAS:
LRAS is perfectly inelastic.
In the long run the only thing that can affect the
output of the economy is an improvement on the
‘Quantity or Quality’ of factors of production. It is
independent of price level.
In the long run there will be full employment of
factors of production (this represents the potential
output of the economy)
 Long run aggregate supply (LRAS)
The Keynesian approach to LRAS:
LRAS is separated into three stages.
It is possible to be operating below full
employment of resources in the long run.
The government should intervene in the market
if there is ‘spare capacity’.
 Long run aggregate supply (LRAS)
The Keynesian approach to LRAS:
Stage 1 – There is spare capacity in the economy
and producers are able to increase production
without seeing an increase in average costs.
Stage 2 – Factors of production are becoming scarce
and spare capacity is being used up. In order to
increase production, firms will see an increase in
their average costs.
Stage 3 – Full employment of resources. Identical to
the new classical LRAS curve.
 Long run aggregate supply (LRAS)
A shift in LRAS can be caused by an
increase in either the quality of the
quantity of factors of production.

Activity
Provide two examples of how you can increase
either the quantity and quality of the following
factors of production
1. Labour + Enterprise
2. Land (natural resources)
3. Capital (machinery)