1. Short run aggregate Supply

2. Learning objectives
To appreciate the difference between the short run aggregate supply (SRAS)curve and the long run aggregate supply (LRAS) curve
To be able to distinguish between inward and outward shifts of the short run aggregate supply curve

3. Aggregate Supply (short run, Classical)
In the short run the firm’s fixed costs are said to remain constant.
An increase in demand can be matched by an increase in output by paying existing workers more.
Price level
SRAS1
Real output

4. Aggregate Supply (short run, Classical)
Changes in the firms factor costs shift the SRAS curve.
Land. An increase in imported raw material prices. (macroeconomic)
Labour. An increase in money wage rates. (macroeconomic)
Capital. An increase in interest rates. (macroeconomic)
Entrepreneurship. An increase in corporation tax. (macroeconomic)
Price level
SRAS2
SRAS1
Real output

5. Aggregate Supply (long run, Keynesian)
The price level makes reference to the retail price index (RPI).
Real output refers to the quantity of goods and services produced in the economy.
0A refers to the level of output where the factors of production are used to the optimum.
As output beyond 0A the factors of production become scare, this is most notable in the labour market.
The scarcity causes their price to rise thus increasing the price level.
There comes a point at which the factors of production become exhausted. This is most notable in the labour market and is known as the full employment level of output.
Price level AS
Real output A B
Optimum
Capacity output
Full
Capacity output

6. Aggregate Supply (long run)
The long run aggregate supply curve (LRAS) is vertical when all factors of production are fully employed.
Price level
LRAS1
Real output

7. Aggregate Supply (long run, Classical)
The LRAS will shift as a there is a change in the availability of the factor of production.
Land - The discovery of new natural resources.
Labour - an increase in the working population
Capital - Improvements in technology
Entrepreneurship- Improvements in entrepreneurial culture (a more free market approach to running the economy).
Price level
LRAS1
LRAS2
Real output

8. Short run and long run aggregate supply curve