• Aggregate supply?is the total supply of goods/services produced within an economy at a?specific price level at a given time

A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy

• The AS curve is?upward sloping?due to two reasons
  • The?aggregate supply?is the combined supply of?all individual supply curves?in an economy which are also upward sloping
  • As?real output?increases, firms have to spend more to increase?production?e.g. wage bills will increase
    • Increased costs result in?higher average prices

A Movement Along the SRAS Curve

• Whenever there is a change in the?average price level (AP)?in an economy, there is a?movement along?the short run aggregate supply (SRAS) curve

A diagram showing an increase and decrease in the average price level (AP) which causes a movement along the short run aggregate supply (SRAS) curve leading to a contraction/expansion of SRAS

Diagram Analysis

• An?increase in the AP?(ceteris paribus)?from?AP1?→ AP2?leads to a?movement?along the?SRAS curve from A → B
  • There is an?expansion of real GDP?from?Y1?→ Y2
• A?decrease in the AP?(ceteris paribus) from?AP1?→ AP3?leads to a?movement?along the?SRAS curve from A → C
  • There is a?contraction?of real GDP?(output) from?Y1→Y3

A Shift of the Entire SRAS Curve

• Whenever there is a?change?in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a?shift of the entire SRAS curve

A diagram showing a shift in the entire short run aggregate supply (SRAS) curve due to a change in one of the conditions of supply in an economy

Diagram Analysis

• A?decrease?in costs or increase in?productivity?results in a?shift right?of the entire curve from?SRAS1?→ SRAS2
  • At?every price level, output and real GDP has?increased from Y1?→ Y2
• An?increase?in costs or decrease in?productivity?results in a?shift left?of the entire curve from?SRAS1?→ SRAS3
  • At?every price level, output and real GDP has?decreased from Y1?→ Y3

• Short run aggregate supply (SRAS)?is influenced by changes in the?costs of production or productivity
  • Short run refers to the time period where at least one?factor of production?is fixed
• Long run aggregate supply (LRAS)?is influenced by a change in the?productive capacity?of the economy
  • Productive capacity is changed by changes to the?quantity or quality?of the?factors of production
    • When production capacity changes, it is equivalent to a?shift inwards/outwards?of the?production possibilities frontier (PPF)
• Long term economic growth?requires the productive capacity to increase