Short Run Aggregate Supply

1. Short Run Aggregate Supply
EdExcel AS Economics 2.3.2

2. Introduction to Aggregate Supply (AS)
• Aggregate supply (AS) is the quantity of goods and services
that producers in an economy are willing and able to supply at
a given level of prices
• Short run aggregate supply (SRAS) is the relationship
between planned national output and the general price level
• SRAS shows how much output the economy can generate in
the short-term at each price level
• A rise in the general price level should stimulate an
expansion of supply
• When prices are falling, production may contract
• The main factor causing a shift in SRAS is the resource cost of
producing goods and services e.g. unit wage costs

3. Short Run Aggregate Supply Curve (AS)
General
Price Level
Real GDP
GPL1
GPL2
AS
Y1 Y2
A rise in the price level causes an
expansion of aggregate supply
The short run AS
curve is upward
sloping because
higher prices for
goods and services
make output more
profitable and
enable businesses
to expand
production by hiring
extra labour and
other resources.

4. Short Run Aggregate Supply Curve (AS)
General
Price Level
Real GDP
GPL1
GPL2
GPL3
AS
Y1 Y2Y3
A rise in the price level causes an
expansion of aggregate supply
A fall in the price
level causes a
contraction of
aggregate supply
The short run AS
curve is upward
sloping because
higher prices for
goods and services
make output more
profitable and
enable businesses
to expand
production by hiring
extra labour and
other resources.

5. Shifts in Short Run Aggregate Supply (AS)
Changes in resource (input) prices
• Wage costs per unit of output
• Labour productivity (higher efficiency ceteris paribus lowers unit costs)
• Raw material and component prices such as glass, cement, rubber
• Energy costs such the world price of oil, gas and electricity
Business taxes, subsidies, regulations and imported costs
• VAT, environmental charges / employment taxes
• Changes in the scale and size of government subsidies to certain industries
• Business rates + costs of meeting business regulations and other laws
• Cost of imported components (affected by the exchange rate +
fluctuations in world commodity prices)
Supply shocks
• E.g. A hurricane, a tsunami or the effects of drought, flooding or a political
crisis / civil war which can have an effect on a country’s national output

6. Shifts in Short Run Aggregate Supply (SRAS)
General
Price Level
Real GDP
GPL1
AS1
Y1
AS2
Y2
A shift from AS1 to AS2
is an inward shift of
the short run
aggregate supply curve
This inward shift in the
aggregate supply curve might
have been caused by a rise in
raw material prices, energy
costs, unit labour costs or
perhaps an increase in the cost
of meeting business
regulations.

7. Shifts in Short Run Aggregate Supply (SRAS)
General
Price Level
Real GDP
GPL1
AS1
Y1
AS3
Y2 Y3
A shift from AS1 to AS3
is an outward shift of
the short run
aggregate supply curve
This outward shift in the aggregate
supply curve might have been
caused by a rise in labour
productivity, or perhaps a decline in
energy costs.

8. External Factors affecting Aggregate Supply (AS)
World oil and gas prices
• The UK is a net importer of oil – an input used in many different industries
Energy prices / costs
• The UK is also a net importer of energy source such as coal
Other mineral / metal prices
• E.g. Rubber, iron ore, rare earths (used in many electronic products)
Foodstuff prices
• E.g. International prices for fresh foods, coffee, wheat, cocoa, sugar
Import tariffs / quotas
• The UK is a member of the European Union which sets a common import
tariff on different goods and services coming into the EU Single Market

9. Changes in global oil prices affect aggregate supply
Source: HM-Treasury Databank
US Dollar Oil Price UK Oil Price
Year on Year change
in oil prices
Year US $ per barrel £ per barrel Per cent
2007 73 36.2 0.9
2008 98 52.1 43.9
2009 63 39.7 -23.9
2010 80 52.0 31.0
2011 111 69.2 33.0
2012 112 70.5 1.9
2013 109 69.5 -1.3
2014 99 60.1 -13.5
2015 (May) 65 42.7 -34.3
Oil is usually priced in US dollars ($) per barrel

10. Cheaper fuel for motorists
and businesses
Decline in value of oil
exports + cheaper imports
Possible fall in exploration &
extraction in the North Sea
Renewable energy less
economically viable
Falling energy costs bring
down inflation
As oil exporter, the UK
exchange rate may fall
Evaluating Economic Effects of Falling Oil Prices

11. Wheat prices affect many industries
Source: DEFRA * data for May 2015
65.02
79.32 80.3
67.43
78.88
120.97
137.87
107.05
123.76
169.17
179.26 175.95
143.06
127.15
0
20
40
60
80
100
120
140
160
180
200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Priceofwheatpertonnein£s
Falling wheat prices in 2014 and 2015 will cause a reduction in the
resource costs for food manufacturers such as cereal producers. If other
commodity prices are also falling, aggregate supply will shift outwards.

12. Long-Run Aggregate Supply (LRAS)
In the long run, the ability of an economy to produce goods and
services to meet demand is based on the state of production
technology and the availability and quality of factor inputs.
General
Price Level
Real GDP
General
Price Level
Real GDPYp
Yp is the
estimated
potential
national
output in the
long run
Yp1 Yp2
An outward
shift of LRAS
shows a rise
in
productive
potential
LAS1 LAS1 LAS2

13. Short Run Aggregate Supply
EdExcel AS Economics 2.3.1