Short Run Aggregate Supply (SRAS)

9 Key excerpts on "Short Run Aggregate Supply (SRAS)"

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  eBook - PDF

  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  A shift in the SRAS curve to the right will result in a greater real GDP and downward pressure on the price level, if aggregate demand remains unchanged. However, if this shift in SRAS results from gains in productivity growth, which we typically measure in terms of a few percentage points per year, the effect will be relatively small over a few months or even a couple of years. Recall how in Choice in a World of Scarcity, we said that a nation's production possibilities frontier is fixed in the short run, but shifts out in the long run? This is the same phenomenon using a different model. How Changes in Input Prices Shift the AS Curve Higher prices for inputs that are widely used across the entire economy can have a macroeconomic impact on aggregate supply. Examples of such widely used inputs include labor and energy products. Increases in the price of such inputs will cause the SRAS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will reduce the possibilities for earning profits. Figure 11.7 (b) shows the aggregate supply curve shifting to the left, from SRAS 0 to SRAS 1 , causing the equilibrium to move from E 0 to E 1 . The movement from the original equilibrium of E 0 to the new equilibrium of E 1 will bring a nasty set of effects: reduced GDP or recession, higher unemployment because the economy is 11.3 • Shifts in Aggregate Supply 281 now further away from potential GDP, and an inflationary higher price level as well. For example, the U.S. economy experienced recessions in 1974–1975, 1980–1982, 1990–91, 2001, and 2007–2009 that were each preceded or accompanied by a rise in the key input of oil prices. In the 1970s, this pattern of a shift to the left in SRAS leading to a stagnant economy with high unemployment and inflation was nicknamed stagflation.

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  eBook - PDF

  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  A shift in the SRAS curve to the right will result in a greater real GDP and downward pressure on the price level, if aggregate demand remains unchanged. However, if this shift in SRAS results from gains in productivity growth, which we typically measure in terms of a few percentage points per year, the effect will be relatively small over a few months or even a couple of years. Recall how in Choice in a World of Scarcity, we said that a nation's production possibilities frontier is fixed in the short run, but shifts out in the long run? This is the same phenomenon using a different model. How Changes in Input Prices Shift the AS Curve Higher prices for inputs that are widely used across the entire economy can have a macroeconomic impact on aggregate supply. Examples of such widely used inputs include labor and energy products. Increases in the price of such inputs will cause the SRAS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will reduce the possibilities for earning profits. Figure 24.7 (b) shows the aggregate supply curve shifting to the left, from SRAS 0 to SRAS 1 , causing the equilibrium to move from E 0 to E 1 . The movement from the original equilibrium of E 0 to the new equilibrium of E 1 will bring a nasty set of effects: reduced GDP or recession, higher unemployment because the economy is 24.3 • Shifts in Aggregate Supply 591 now further away from potential GDP, and an inflationary higher price level as well. For example, the U.S. economy experienced recessions in 1974–1975, 1980–1982, 1990–91, 2001, and 2007–2009 that were each preceded or accompanied by a rise in the key input of oil prices. In the 1970s, this pattern of a shift to the left in SRAS leading to a stagnant economy with high unemployment and inflation was nicknamed stagflation.

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  eBook - ePub

  A Primer on Macroeconomics

  Policies and Perspectives

  • Thomas M. Beveridge(Author)
  • 2018(Publication Date)
  • Business Expert Press

    (Publisher)

  their jobs, put in a bit more effort. This is a temporary phenomenon—once normality returns, workers ease off once more.

  Expectations about Inflation:

  We have concluded that changes in resource costs affect the position of the SRAS curve. But, one step back, expectations about inflation influence resource costs. If workers expect the inflation rate to be zero, then they ought to be content with their current wage settlement. However, if they believe the inflation rate will rise to 7 percent, then (even though this belief is mistaken!) they will feel justified in asking for a wage hike of 7 percent that will increase per-unit costs, decrease profits, and push the SRAS curve to the left. Similarly, if employers’ expectations regarding future prices change, for example, a new expectation of rising prices, then firms will anticipate higher wage claims and rising costs, and, in response, they will decrease output at any given price level—the SRAS curve will shift to the left. On the other hand, if there is a downward adjustment in expected inflation rates, then the SRAS curve will shift to the right.

  Macroeconomic Equilibrium: Balance in the Short Run Reaching Short-Run Equilibrium

  In this section, we examine how the macroeconomy achieves short-run equilibrium. Considering Figure 5.11 , we have done enough economics by this point to realize that initial equilibrium occurs where the two curves, AD1 and SRAS1 , intersect, at an aggregate price level of P* and an output level of y*. However, it is worthwhile to trace through the process by which the economy achieves that equilibrium.

  To analyze the equilibrating process, let us suppose that the AD curve initially is at AD0 , and that the equilibrium price and output are P0 and y0 , respectively. Now aggregate demand increases from AD0 to AD1

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  Economics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Short-Run Aggregate Supply In the short run, prices may rise faster than costs. This chapter discusses why this might happen. Suppose that labor and management agree to adjust wages continuously for any changes in the price level. How would such adjustments affect the slope of the aggregate supply curve? 2. Potential Output Define the economy’s potential output. What factors help determine potential output? 3. Actual Price Level Higher than Expected Discuss some instances in your life when your actual production for short periods exceeded what you considered your potential, or normal, production. Why does this occur only for brief periods? 4. Nominal and Real Wages Complete each of the following sentences: a. The _______ wage measures the wage rate in dollars of the year in question, while the _______ wage measures it in con- stant dollars. b. Wage agreements are based on the _______ price level and negotiated in _______ terms. Real wages are then deter- mined by the _______ price level. c. The higher the actual price level, the _______ is the real wage for a given nominal wage. d. If nominal wages are growing at 2 percent per year while the annual inflation rate is 3 percent, then real wages change by _______. 5. Recessionary Gaps After reviewing Exhibit 3 in this chapter, explain why recessionary gaps occur only in the short run and only when the actual price level is below what was expected. 6. Short-Run Aggregate Supply In interpreting the short-run aggregate supply curve, what does the adjective short-run mean? Explain the role of labor contracts along the SRAS curve. 7. Recessionary Gap What does a recessionary gap imply about the actual rate of unemployment relative to the natural rate? What does it imply about the actual price level relative to the expected price level? What must happen to real and nominal wages in order to close a recessionary gap? 8.

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  Principles of Macroeconomics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  prices of inputs fixed an economy experiences stagnant growth and high inflation at the same time KEY CONCEPTS AND SUMMARY 11.1 Macroeconomic Perspectives on Demand and Supply Neoclassical economists emphasize Say’s law, which holds that supply creates its own demand. Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply. Many mainstream economists take a Keynesian perspective, emphasizing the importance of aggregate demand, for the short run, and a neoclassical perspective, emphasizing the importance of aggregate supply, for the long run. 11.2 Building a Model of Aggregate Demand and Aggregate Supply The upward-sloping short run aggregate supply (SRAS) curve shows the positive relationship between the price level and the level of real GDP in the short run. Aggregate supply slopes up because when the price level for outputs increases, while the price level of inputs remains fixed, the opportunity for additional profits encourages more production. The aggregate supply curve is near-horizontal on the left and near-vertical on the right. In the long run, Chapter 11 | The Aggregate Demand/Aggregate Supply Model 289 we show the aggregate supply by a vertical line at the level of potential output, which is the maximum level of output the economy can produce with its existing levels of workers, physical capital, technology, and economic institutions. The downward-sloping aggregate demand (AD) curve shows the relationship between the price level for outputs and the quantity of total spending in the economy.

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  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Again, higher input costs would lead businesses to raise output prices. But here, higher input costs are due to decreased supplies of inputs. For any level of output supplied, higher input costs would cause output prices to rise. Higher input costs due to decreased supply of inputs shifts the SRAS curve up. Shifts of the aggregate supply curve are illustrated in Figure 14.8. To summa- rize the factors that can shift aggregate supply: ↑Quantities of inputs → shift LRAS and SRAS to the right ↓Quantities of inputs → shift LRAS and SRAS to the left ↑Productivity of inputs → shift LRAS and SRAS to the right ↓Productivity of inputs → shift LRAS and SRAS to the left ↑Costs of inputs → shift SRAS up (equivalently, to the left) ↓Costs of inputs → shift SRAS down (equivalently, to the right) SRAS 2 Real GDP Average price level (P) LRAS 2 Old GDP potential New GDP potential SRAS 1 LRAS 1 Figure 14.8 Shifts of the Aggregate Supply Curves. A change in the average level of output prices or in GDP supplied moves us along an exist- ing SRAS curve. An increase in quantities of inputs or in the productivity of inputs shifts both the LRAS and the SRAS curves to the right. 256 Chapter 14 Inflation and Output: The AS/AD Approach TRY 13. For each of the following events, what is its effect on the LRAS and SRAS curves? a. Labor force grows b. Amount of capital in the economy increases c. Labor productivity rises d. The price of energy rises AS /AD EQUILIBRIUM Aggregate demand is the set of combinations of average price level and planned aggregate expenditure, C + I + G + NX . At a higher average price level, planned aggregate expenditure is lower due to the interest rate, wealth, and foreign trade effects. The aggregate demand curve slopes down. Aggregate supply is the set of combinations of average price level and amount of output businesses want to produce, GDP supplied. At a higher average price level, firms produce more output in the short run.

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  eBook - ePub

  Economics For Dummies

  Book + Chapter Quizzes Online

  • Sean Masaki Flynn(Author)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  * . There is neither a surplus nor a shortage that could cause prices to change.

  The SRAS curve is horizontal at price

  P0

  to reflect the fact that after the economy reaches its equilibrium (where

  AD0

  intersects the LRAS at output level

  Y*

  ), the prices that are determined at that level are fixed in the short run; they can’t change immediately, even if a demand shock happens to come along.

  For instance, suppose that the aggregate demand curve shifts left from

  AD0

  to

  AD1

  because of a negative demand shock of some sort. Because prices are fixed in the short run at

  P0 ,

  the economy’s first response is to move from Point A to Point B. In other words, because prices are fixed, production falls from

  Y*

  down to

  YLow

  as firms respond to decreased demand by cutting production. (Small arrows indicate the movement of the economy from Point A to Point B. )

  © John Wiley & Sons, Inc.

  FIGURE 16-5: Short-run and long-run responses to a negative demand shock.

  At Point B, the economy is operating below full employment, implying that a lot of workers are unemployed. This high level of unemployment causes wages to fall. As wages fall, firms’ costs also fall, allowing them to cut prices to attract more customers.

  Falling prices cause increased aggregate demand for goods and services, which eventually moves the economy all the way from Point B to Point C . (Arrows on the graph indicate this movement.) When the economy reaches point C, it’s once again producing at full employment,

  Y*

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  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  Central banks in economies that start with stable low-inflation rates can increase output beyond full employment by expansionary monetary policies, provided that such policies generate unanticipated inflation. However, as inflation picks up, the experience of rising inflation rates causes two changes:

  1. As soon as the actual inflation rate, and the error in the expected inflation rate, becomes known, firms learn that they had made an error in their price expectations. They cancel its effects by revising their expectations, which reduces or eliminates the error and the effect on output.

  2. For future inflation or the acceleration in it, firms lower their value of their response factor α. Hence, the benefit of increasing inflation rates in raising output lessens. It disappears in hyperinflation.

  Extended Analysis Box 8.2: Diagrammatic Analysis: Comparing the FSR and LSR Curves (FSR and LSR) and the LRAS Curve

  Both the Lucas supply rule (LSR) and the Friedman supply rule (FSR) are aspects of the short-run behavior of equilibrium output under expectational errors. Figure 8.3a illustrates both the SRAS and LRAS curves under the FSR and the LSR. For both hypotheses, the LRAS curve comes about if there are no errors in expectations. The aggregate demand curve AD has a negative slope, as derived in Chapter 5 for the open economy.

  For the SRAS, assume that the initial equilibrium price level P 0 is known — and, therefore, fully expected with P e 0 = P 0 . If expected prices remain equal to this initial price level, an increase in P will create positive errors in expectations, implying, under both the FSR and the LSR curves, that the economy will increase output in the short run. Therefore, the SRAS curve has a positive slope at the point a. In Figures 8.3a and 8.3b, start by assuming that an increase in aggregate demand from AD0 to AD1 shifts the actual price level to P 1 , but without a shift in the expected price level, which still equals P 0 . With P 1 > P e 0 = P 0 , in the short run, the output supplied will be y 1 along the SRAS0 . Sooner or later, the public will learn about the positive error in its expectations, and revise upward the expected price level to P 1 , i.e., P e 1 becomes equal to P 1 . This will cause nominal wages to rise under the FSR. It would also cause the perception of relative price increases to decrease under the LSR. If the price level remains at P 1 , so that the actual and expected prices become identical, output will revert to y f 0 , i.e., return to the LRAS curve. The resulting fall in output from y 1 to y f 0

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Operating in prosperous, swiftly moving nations is like swimming in a rapidly moving stream because it makes increased sales volume easier to achieve and price hikes easier to implement. When companies operate in countries with infla-tionary climates, price increases are necessary just to keep even in real terms. What causes short-run changes in a nation ’ s average price level (i.e., GDP Price Index) and output (i.e., real GDP)? What happens to the GDP Price Index and real GDP when oil prices rise due to an embargo, war in the Middle East, or in-creased demand by China and India? Are there economic differences when prices rise due to increasing costs as opposed to increasing demand? What is the relation-ship between a nation ’ s unemployment rate and GDP Price Index? How can com-panies factor these changes into their financial planning? This chapter addresses these questions using the aggregate supply and aggregate demand framework. The Basics Aggregate Supply Curve The aggregate supply (AS) curve shows the quantity of domestically produced goods and services that firms are willing and able to produce and sell at various average national price levels during a given period. A nation ’ s average price level is just another name for the GDP Price Index (P), and as Figure 12.1 shows, https://doi.org/10.1515/9781547401437-012 it is placed on the vertical axis of the aggregate supply graph, with real gross domestic product (RGDP) placed on the horizontal axis. The curvature of the aggregate supply curve shown in Figure 12.1 is easiest to understand if we separate it into three ranges, which are the Keynesian range, classical range, and intermediate range. Keynesian Range The horizontal portion of aggregate supply is called the Keynesian range , where a nation ’ s real GDP is extremely low (depression-like), unemployment is very high, and companies have plenty of excess capacity.

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