Question

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.

Short answer

In conclusion, the near-horizontal shape of the Short-Run Aggregate Supply (SRAS) curve on its far left, or the Keynesian range, is due to the presence of underutilized resources, low increase in production costs, and the presence of price level stickiness during periods of recession. Firms can ramp up production using these idle resources without incurring significant additional costs, resulting in a near-horizontal SRAS curve at this stage.

Step-by-step solution

Understand the SRAS Curve

Short-Run Aggregate Supply (SRAS) curve is a graphical representation of the relationship between the level of the real GDP produced by firms and the price level in an economy in the short-run. The SRAS curve shows how changes in the price level, holding ceteris paribus (other things equal), lead to changes in the quantity of goods and services supplied in the economy. The SRAS curve has three main sections: horizontal, upward-sloping, and vertical.

Near-horizontal section of the SRAS curve

At the far left of the SRAS curve, the curve is near-horizontal. This is also referred to as the Keynesian range of the curve. In this region, a change in the price level has almost no impact on the total quantity of goods supplied. The reason for this is that, during a recession, there are a large number of underutilized resources, and the economy operates significantly below full employment levels. Firms are able and willing to respond to any increase in the price level by producing more output, using these idle resources without a significant increase in production costs.

Reason for the near-horizontal shape

The near-horizontal shape of the SRAS curve on its far left can be explained by the presence of excess capacities (unemployed labor and underutilized capital) and price level stickiness. When the economy is in a recession, firms have access to a large pool of unemployed workers and underutilized capital resources, which they can hire or put to use at a relatively low or constant cost to increase production. As a result, increases in the price level do not lead to a substantial increase in the cost of production. This causes firms to be willing to produce larger quantities of goods at nearly the same cost of production. Furthermore, they keep the price level stickiness, prices do not adjust instantly, thus resulting in a near-horizontal SRAS curve at this stage.

Summary

In conclusion, the near-horizontal shape of the SRAS curve on its far left, or the Keynesian range, is due to the presence of underutilized resources, low increase in production costs, and the presence of price level stickiness during periods of recession. Firms can ramp up production using these idle resources without incurring significant additional costs, resulting in a near-horizontal SRAS curve at this stage.