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AP® Macroeconomics · Unit 3 · Topic 3.3

Short-Run Aggregate Supply (SRAS): Revision Notes (Macroeconomics 3.3)

One-page recap of the SRAS curve: axes, sticky wages and prices, shifts versus movements, expected inflation and the short-run trade-off between inflation and unemployment.

Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.

Recap

  • The SRAS curve shows the real output all firms supply at each price level in the short run.
  • Short run: nominal wages and some other input prices are fixed.
  • It slopes upward because wages and prices are sticky: when the price level rises, costs lag, profit per unit rises and firms produce more. The real wage falls.
  • A change in production costs shifts the curve. A change in the price level moves the economy along it.
  • Moving up SRAS: output ↑, employment ↑, unemployment rate ↓ (labour force fixed). This is the short-run trade-off between inflation and unemployment.

Key relationships

Change Effect on SRAS
Price level rises Movement up along SRAS
Nominal wages or other input prices rise Shift left (decrease)
Expected inflation rises Shift left: higher wage demands
Productivity rises Shift right (increase)
Producer subsidies, lower business taxes Shift right
Bad harvest, natural disaster Shift left
Consumer confidence, household taxes No SRAS effect: AD shifts

Assumptions

  • Some input prices, especially nominal wages, are fixed for a period.
  • The labour force is constant when linking output to unemployment.
  • Left and up describe the same decrease; right and down the same increase.
  • The long run, when all prices adjust, is Topic 3.4.

Mistakes to avoid

  1. Labelling the axes “Price” and “Quantity”.
  2. Explaining the slope with the law of supply or with AD’s wealth or interest-rate effects.
  3. Shifting SRAS because the price level changed.
  4. Shifting SRAS right when expected inflation rises.
  5. Shifting SRAS for a change in household spending.
  6. Saying a lower unemployment rate comes from a smaller labour force. Along SRAS it comes from more jobs, with the labour force fixed.
  7. Comparing two price levels on one curve and calling it a shift. To show a shift, compare the same price level on two curves.

Quick self-check

VD is the valda, the currency of the fictional country Valdoria used in the study guide.

  1. The price level rises from 100 to 108 and a contract fixes the nominal wage at VD 24 an hour. What is the real wage in base-period valdas? (VD 22.22)
  2. Firms supply VD 40 billion less at every price level. Left or right? (Left: a decrease)
  3. Labour force 25.0 million, employment rises from 23.50 to 24.00 million. New unemployment rate? (4.0%)

Next: practice questions.

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