Short Run Aggregate Supply Curve

short run aggregate supplyThe relationship between the price to produce a product and the quantity of the product produced is called short run aggregate supply (SRAS). It is expressed in a SRAS curve, which shows this relationship of price and quantity. This curve is usually featured beside the demand aggregate curve when levels of quantity and price equilibrium are demonstrated.

The SRAS curve is different from the long-run aggregate supply (LRAS) curve since price is determined by production and price levels as compared to in the longer run, when it is only determined by the price given and production factors.

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The SRAS Curve

In economics, the SRAS curve is a basic concept. Essentially it explains the relationships between a firm’s supplied quantity and the corresponding prices. The relationship of the economy in its entirety is also described by the SRAS curve. There are two models that support SRAS curve and these are the sticky-price and the sticky-wage model.

sras

In the graph, you will see that the real production is graphed on the horizontal axis and the level of price is graphed on the vertical axis. The real GDP (Gross Domestic Product)  expresses the real production and is measured by the GDP price deflator.  Also, you will see that the SRAS curve has a slope that is positive. The sector of business offers aggregate real production for sale and this gets more as levels of higher price and at lower levels of price, it is less.

The only two variables allowing changes in the curve construction is the aggregate real production and the price level. Other variables that could possibly affect SRAS are presumable constant and will remain so. These other analogous variables to supply of the market go under the category of determinants of aggregate supply and are factors that are considered to be ceteris paribus or all other things being equal.

When graphically viewed, with quantity on the x-axis and price on the y-axis, the SRAS curve further increases with the increase in prices. This is different from the vertical, straight line of the LRAS curve. A variety of models can explain why the curve is sloping upwards. However, the two most common reasons are the sticky-price and the sticky-wage models. Here is a course you might want to check out entitled Economics without Boundaries with David McWilliams which shows you exactly how the global economy works.

Considered Valid for a Short Period of Time

The SRAS curve is considered a valid economic supply schedule only in the short run. This is the period that starts just after a price level increase and ends when price inputs increase in the same proportion to the price level increase. Price inputs are the paid prices to providers of input services and goods.

These price inputs include the wages that workers get paid, the prices paid to the intermediate goods suppliers, the rent paid to landowners and the capital providers. Once the providers of inputs realize that there has been an increase in the cost of living, they will increase the charged prices for their services and goods proportionally to the increase in the level of price for final goods.

Presumptions

Underlying the SRAS curve, the presumption is that providers of input are not able to take account of the general price level increase immediately so it takes some time, called the ‘short run’ for prince inputs to totally reflect price level changes for final goods. For example, a worker negotiates contracts with employers for multi-years. These usually include allowances for price level increases, called ‘cost of living adjustments (COLA).’

Keep in mind that the COLA depends on future price level expectations that could turn out to be erroneous. For example, when a worker underestimates price level increase that happens in a contract of multi-years, depending on the contract terms, the workers might not have opportunities to correct the estimated mistakes of inflation until the expiry of the contract.

When this happens, the increase in wage lags behind the price level increase for a period of time. Here is a course entitled The Chartered Economist: Intro into Managerial Economics which you might be interested in.

The Sticky Prices Model

When prices aren’t changed immediately due to reasons that are external, this means that the price is sticky. Imperfect information causes sticky prices, which means that companies don’t always have the right economic information immediately.

Thus, when firms expect inputs of higher prices, they begin setting their own price ranges higher. So they can begin capitalizing on the perceptions of the first firm about price inputs, other firms do this as well.The higher price outputs serve as incentive to firms for increased production, as there will be greater profits.

With higher production levels, there is also an increase in demand, which then causes an increase in sticky prices. This is a continuous process which results in a supply curve that slopes upwards.

The Sticky Wages Model

When the wages do not greatly fluctuate with time, sticky wages are the result. This occurs when workers tend to be paid on a contractual, pre-agreed basis. It takes time for workers to alter their wages due to the misconception workers have about prices in the economy.

Real wages fall when there is a rise in price. As opposed to nominal wages, real wages can be defined as your power to purchase. When there is a fall in wages, it is more affordable for firms to hire more employees for more output to be produced.

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