Short-run aggregate supply (SRAS) shows how much real GDP firms produce at each price level while nominal wages and some other input prices are still stuck. Use the left graph to move along SRAS by changing the price level. Use the right graph to shift SRAS with real-world events and see what happens to real GDP and the price level when AD stays put.
Teaching numbers: the economy starts at a price level of 100 and real GDP of $1,000 billion. Dashed grey lines show where each graph started.
In the short run, nominal wages are fixed by contracts and norms, and some other input prices are slow to change. When the price level rises, firms get more for their output while costs stay the same. Profit per unit rises, so firms produce more real GDP.
A change in the price level moves the economy along the SRAS curve. A higher price level means more real GDP supplied; a lower price level means less. The curve itself does not move.
A change in anything that affects production costs at every price level shifts the whole curve. Higher per-unit costs shift SRAS left (a decrease). Lower per-unit costs shift it right (an increase).
Input prices such as wages and oil, productivity, business taxes and subsidies, government regulation, expected inflation, and supply shocks. Each one works through the cost of producing a unit of output.
If workers and firms expect higher inflation, workers ask for higher nominal wages and suppliers raise input prices now. Costs rise at every price level, so SRAS shifts left.
When SRAS shifts left and AD does not change, the price level rises and real GDP falls at the same time. That mix of inflation and falling output is called stagflation, and the price rise is cost-push inflation.
Each row assumes AD does not change. Memorize the direction of the shift first; the price level and real GDP follow from the graph.
| Event | Effect on SRAS | Price level | Real GDP |
|---|---|---|---|
| The price level rises | Movement up along SRAS (quantity supplied rises) | ↑ (the cause) | ↑ |
| The price level falls | Movement down along SRAS (quantity supplied falls) | ↓ (the cause) | ↓ |
| Oil or other commodity prices rise | Shifts left | ↑ | ↓ |
| Oil or other commodity prices fall | Shifts right | ↓ | ↑ |
| Nominal wages rise across the economy | Shifts left | ↑ | ↓ |
| Productivity rises (better technology, training) | Shifts right | ↓ | ↑ |
| Business taxes rise | Shifts left | ↑ | ↓ |
| Government subsidizes producers | Shifts right | ↓ | ↑ |
| New costly government regulation | Shifts left | ↑ | ↓ |
| Regulation is reduced (deregulation) | Shifts right | ↓ | ↑ |
| Expected inflation rises | Shifts left | ↑ | ↓ |
| Negative supply shock (drought, natural disaster) | Shifts left | ↑ | ↓ |
| Positive supply shock (bumper harvest) | Shifts right | ↓ | ↑ |
| Consumer spending, government spending, or net exports change | No shift (these shift AD) | See topic 3.1 | |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 3.3. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 3 terminology guide.