Question

The short-run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Short answer

An increase in the prices of important inputs, like energy, affects aggregate supply by shifting it to the left.

Step-by-step solution

Step 1. Definitions.

The total quantity of output (i.e. real GDP) firms will produce and sell is aggregate supply

The positive short-run relationship between the price level for output and real GDP, holding the prices of inputs fixed shows the Short-Run Aggregate Supply (SRAS) Curve.

Step 2. The shift in the SRAS curve.

An increase in the prices of important inputs, like energy, affects aggregate supply by shifting it to the left. An increase in the price of inputs will increase the cost of production which will reduce the production of the output. The reduction will reduce the possibility of profits shifting the aggregate supply curve to the left.