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Aggregate Supply
Aggregate Supply (AS) – Goods and services that suppliers are willing to supply at any given price
level.
Short-run aggregate supply (SRAS) – Always angled. A relationship between price and real GDP.
As price increases, real wages and labour become cheaper.
As price decreases, productivity falls and so does real GDP.
Misperception Theory – Business may think it’s a micro problem then law of supply kicks in as they
believe they will make more profits however this is not the case as all prices are going up. When they
think they are making more money they produce more than when they notice it goes down again.
Sticky wages- In the economy the prices are increasing at different speeds this may be because of
contracts etc to reflect the economy. Menu costs is if the price goes up by 5% then you will sell it for
5% this means that people need time to change these prices, changing menu telling staff etc.
If company A is selling lemonade they notice they are able to raise the prices, but yet company B is
in a contract to supply lemons at a fix price then Company B has Sticky prices and company A has
sticky cost as they will not change in the short run.
Shifts in the SRAS is caused by several different factors including:
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Employment costs
Changes in resource/Input costs
Commodity prices
Change in exchange rate
Government taxations, regulations, subsides etc
The price of imports
Supply shock (War, Earthquake, Hurricane)
Inward shifts – Less supply at any given price level. Caused by Increased energy costs, higher labour
costs etc.
Outward shift – More supply at any given price level. Caused by Labour productivity increases,
Energy costs are lower etc.