2.3.1 Characteristics of AS

• Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time

A diagram showing the upward sloping short run aggregate supply (SRAS) curve for an economy

• The AS curve is upward sloping due to two reasons
  • The aggregate supply is the combined supply of all individual supply curves in an economy which are also upward sloping
  • As real output increases, firms have to spend more to increase production e.g. wage bills will increase
    • Increased costs result in higher average prices

A Movement Along the SRAS Curve

• Whenever there is a change in the average price level (AP) in an economy, there is a movement along the short run aggregate supply (SRAS) curve
  
  

A diagram showing an increase and decrease in the average price level (AP) which causes a movement along the short run aggregate supply (SRAS) curve leading to a contraction/expansion of SRAS

Diagram Analysis

• An increase in the AP (ceteris paribus) from AP₁ → AP₂ leads to a movement along the SRAS curve from A → B
  • There is an expansion of real GDP from Y₁ → Y₂
    
    
• A decrease in the AP (ceteris paribus) from AP₁ → AP₃ leads to a movement along the SRAS curve from A → C
  • There is a contraction of real GDP (output) from Y₁→Y₃

A Shift of the Entire SRAS Curve

• Whenever there is a change in the conditions of supply in an economy (e.g. costs of production or productivity changes), there is a shift of the entire SRAS curve
  
  

A diagram showing a shift in the entire short run aggregate supply (SRAS) curve due to a change in one of the conditions of supply in an economy

Diagram Analysis

• A decrease in costs or increase in productivity results in a shift right of the entire curve from SRAS₁ → SRAS₂
  • At every price level, output and real GDP has increased from Y₁ → Y₂
    
    
• An increase in costs or decrease in productivity results in a shift left of the entire curve from SRAS₁ → SRAS₃
  • At every price level, output and real GDP has decreased from Y₁ → Y₃

• Short run aggregate supply (SRAS) is influenced by changes in the costs of production or productivity
  • Short run refers to the time period where at least one factor of production is fixed
    
    
• Long run aggregate supply (LRAS) is influenced by a change in the productive capacity of the economy
  • Productive capacity is changed by changes to the quantity or quality of the factors of production
    • When production capacity changes, it is equivalent to a shift inwards/outwards of the production possibilities frontier (PPF)
      
      
• Long term economic growth requires the productive capacity to increase