Aggregate supply measures the volume of goods and services produced each year. AS represents the ability of an economy to deliver goods and services to meet demand
Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g. wage rates and the state of technology are held constant.
Long run aggregate supply shows total planned output when both prices and average wage rates can change – it is a measure of a country’s potential output and the concept is linked to the production possibility frontier
Short Run Aggregate Supply Curve
A change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, we see an expansion of SRAS; if AD falls we see a contraction of SRAS.
Shifts in Short Run Aggregate Supply (SRAS)
Shifts in the position of the short run aggregate supply curve in the price level / output space are caused by changes in the conditions of supply for different sectors of the economy:
The main cause of a shift in the aggregate supply curve is a change in business costs – for example:
1.Changes in unit labour costs - i.e. labour costs per unit of output
2.Changes in other production costs: For example rental costs for retailers, the price of building materials for the construction industry, a change in the price of hops used in beer making or the cost of fertilisers used in farming.
3.Commodity prices Changes to raw material costs and other components e.g. the prices of oil, natural gas, electricity copper, rubber, iron ore, aluminium and other inputs will affect a firm’s costs
4.Exchange rates: Costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas
5.Government taxation and subsidies:
6.The price of imports:
Key revision point: The main driver of SRAS for the economy is the level of production costs some of which are influenced by government policy, others by world prices. Remember that the exchange rate is important for the UK because a large percentage of our components / raw materials / energy are imported.