Question

What variables cause the short-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the short- run aggregate supply curve to shift to the right or to the left.

Short answer

Variables that can shift the SRAS curve include resource prices, technological change, and supply shocks. An increase in resource prices or adverse supply shock moves it to the left, while efficiency improvements in technology shift it to the right.

Step-by-step solution

Understanding the SRAS Curve

The Short-Run Aggregate Supply curve, or SRAS curve, depicts the total quantity of goods produced by firms at different price levels in the short-run. It is upward sloping, meaning it shows that as prices for outputs rise, firms tend to supply more of their goods.

Identifying Variables Affecting the SRAS Curve

There are several variables which can cause the SRAS to shift, such as resource prices (including wages), technological change, and supply shocks like natural disasters or changes in the legal or regulatory environment.

Predicting Direction of Shift Based on Increase in Variables

An increase in resource prices or an adverse supply shock (like a natural disaster) would cause the SRAS curve to shift to the left, as it becomes more costly to produce goods so firms supply less. Conversely, an increase in technological efficiency leads to lower costs of production, causing the SRAS curve to shift to the right as firms can supply more at every price level.

Key concepts

Resource Prices

Resource prices play a crucial role in determining the position of the short-run aggregate supply (SRAS) curve. These prices include the costs of various inputs used in production, such as labor, raw materials, and energy. When these costs rise, it becomes more expensive for firms to produce goods and services. Hence, firms may opt to produce less, leading to a leftward shift in the SRAS curve. This indicates a decrease in the total output supplied at each price level.

Conversely, when resource prices fall, production becomes cheaper for firms. Consequently, they will likely increase production, which shifts the SRAS curve to the right. This rightward shift represents an increase in the total output at each price level. It’s important to monitor changes in resource prices as they directly impact the supply decisions of firms and the economy’s overall output.

Technological Change

Technological change is a significant factor influencing the SRAS curve. Technological advancements improve the efficiency of production processes. This means firms can produce more output using the same amount of resources. Typically, this results in a rightward shift of the SRAS curve, indicating an increase in the total output supplied at each price level.

For example, the adoption of new machinery or software can streamline operations, reduce wasted materials, and speed up production time. This not only lowers production costs but can also allow firms to meet higher demands without raising prices. Furthermore, innovation and improvements in technology enhance the productivity of labor, developing new methods and tools that make jobs easier and more productive. As technology continues to progress, it contributes significantly to economic growth and increased supply capabilities.

Supply Shocks

Supply shocks are unforeseen events that suddenly affect supply levels in the economy. These can be either positive or negative and have a direct impact on the SRAS curve. Negative supply shocks, like natural disasters, political instability, or sudden changes in policies and regulations, often cause the SRAS curve to shift to the left. Such events can disrupt production, lead to higher costs, and reduce the overall supply of goods.

On the other hand, positive supply shocks—for example, a sudden increase in resource availability or a successful development in technology—can cause the SRAS curve to shift to the right. This is because these positive changes make it easier and cheaper for firms to produce more goods. Positive supply shocks are sometimes referred to as beneficial because they help boost the economy by increasing supply while potentially lowering prices. Understanding the nature and impact of supply shocks is important in predicting economic outcomes and formulating policy responses.