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The Aggregate Supply (AS) Curve

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

Graph showing the short-run aggregate supply (SRAS) curve, upward sloping with average price level (£) on the vertical axis and real GDP on the horizontal axis. — A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy

The SRAS 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

Graph showing SRAS curve with points A, B, and C, indicating expansion and contraction of SRAS. Axes show average price level and real GDP. — 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 (extension) 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 (extension) 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), there is a shift of the entire SRAS curve

Graph showing three SRAS curves sloping upwards from left to right with points AP₁, Y₁, Y₂, Y₃ labelled, representing shifts in economic output. — 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 labour costs results in a shift right of the entire curve from SRAS₁→ SRAS₂
- At every price level, output and real GDP have increased from Y₁→ Y₂
An increase in labour costs results in a shift left of the entire curve from SRAS₁→ SRAS₃
- At every price level, output and real GDP have decreased from Y₁→ Y₃

The Relationship Between Short-run & Long-run AS

Short run aggregate supply (SRAS) is influenced by changes in the costs of production
- 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

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