Lesson 11 of 17
Aggregate supply curve shows the quantity of goods and services that firms choose to produce and sell (quantity of real GDP supplied) at each price level. When the aggregate supply increases, the SRAS shifts to the right and the quantity supplied at each level increases. The level output can be affected by many factors which will shift the aggregate supply curve. Note that in the short run, the wage rates and input prices are considered to be stick. Any change in the price levels is a movement along the supply curve and does not cause the shift in the supply curve.
Following are a few factors that cause the SRAS to shift:
1. Changes in input prices:
If input prices such as wage rates decrease, then firms can increase production at the same cost, leading to an increase in short-run aggregate supply.
2. Changes in resource prices
If the price of oil and other factors of production decrease (those that are not sticky) then firms will seek to produce more. This will cause a rightward shift in the SRAS curve.
3. Technology changes
If technology makes it cheaper to produce something, then firms will again be able to expand their production and therefore, it will cause a rightward shift in SRAS.
4. Expectation of future prices
If a firm expects greater demand in the future, it will be more likely to expand production in the present to prepare for such a situation. This too will shift the SRAS curve to the right.
5. Exchange rates
Even changes in exchange rates can affect short-run aggregate supply. If the currency of a country appreciates, its imports will become cheaper. Any imports which are productive inputs will help the company reduce production cost or increase their output, thereby increasing SRAS.
In the long run, the aggregate supply curve (LRAS) is perfectly inelastic. This is the potential level of real GDP (at full employment). This is the highest level of GDP that can be sustained over the long run. Since at this point all the resources in the economy are used optimally, the only factors that can cause a shift in the long run aggregate supply are capital, labour and technology. These factors can affect the natural rate of output causing the LRAS to shift. An increase in labour, capital, supply of natural resources or improvement in technology increases the output and shifts the LRAS to the right. Similarly a decrease in these factors will shift the LRAS to the left.
As we noticed, some factors affect both LRAS and SRAS while some affect only SRAS. Let’s review these factors.
Factors that affect both LRAS and SRAS:
Factors that affect only SRAS: