Cambridge International as and a level Economics Ebook

short-run aggregate supply
(
SRAS
)
and 
long-run aggregate supply (
LRAS
)
. Short-run 
aggregate supply is the output that will be supplied in a 
period of time when the prices of factors of production 
(inputs, resources) have not had time to adjust to changes 
in aggregate demand and the price level. In contrast, long-
run aggregate supply is the output that will be supplied in 
the time period when the prices of factors of production 
have fully adjusted to changes in aggregate demand and 
the price level.
Aggregate supply (
AS
): 
the total output (real GDP) that 
producers in an economy are willing and able to supply at a 
given price level in a given time period.
Short-run aggregate supply (
SRAS
): 
the total output 
of an economy that will be supplied when there has not 
been enough time for the prices of factors of production to 
change.
Long-run aggregate supply (
LRAS
): 
the total output of 
a country supplied in the period when prices of factors of 
production have fully adjusted.
KEY TERMS
The short-run aggregate supply curve
Th
e short-run aggregate supply curve slopes up from left to 
right as shown in 
Figure 4.3
.
As the price level rises, producers are willing 
and able to supply more goods and services. There 
are three possible reasons for this positive 
relationship:
1
The profit eff ect: As the price level (that is, the price of 
goods and services) increases, the price of factors of 
production such as wages do not change. So the price level 
rises, the gap between output and input prices widens and 
the amount of profit increases.
2
The cost eff ect: Although the wage rates and raw 
material costs remain unchanged in the short run, 
average costs may rise as output increases. This is 
because, for example, overtime payments may have to 
be paid and costs will be involved in recruiting more 
members. To cover any extra costs that may be involved 
in producing a higher output, producers will require 
higher prices.
FPO
Figure 4.2 
An increase in aggregate demand
0
Price level
Real GDP
AD
AD
AD
1
AD
1