Shifting Short Run Aggregate Supply - Online Tutor, Practice Problems & Exam Prep

Short-run aggregate supply (SRAS) can shift due to various factors affecting production. Positive changes, like increased labor or technology, shift SRAS to the right, enhancing output. Conversely, negative events, such as rising unemployment or resource scarcity, shift it left, reducing supply. Expectations about future price levels also influence SRAS; anticipated increases boost supply, while expected decreases hinder it. Supply shocks, whether beneficial or detrimental, can cause immediate shifts. Understanding these dynamics is crucial for analyzing economic fluctuations and the business cycle.

Shifting SRAS

So just like with market demand and supply, we learned how to shift the curves left and right. We already discussed how to shift aggregate demand. Now let's see how we shift our short run aggregate supply. So, there's going to be factors that change other than the price level affecting our aggregate supply, right? So now we're thinking about our short run aggregate supply curve and what factors can affect it to make it shift left or right. Okay? Aggregate supply is different in the short run and in the long run. And one thing we said about the long run—So over here, I want to say something about the long run. Remember that we had this straight up and down curve because it was fixed in the long run how much we were going to be able to produce based on what's available in the economy, right? So in general, what we see in the long run is shifts to the right. In for the most part, over time, we see shifts to the right because of things like technology increasing. There are just general increases, increases in population. There's just usually more and more. There has to be some sort of event causing it to shift to the left that will shift our long run to the left, right? But in general, what we see is it shifting to the right just because of a general increase in resources such as labor, from more population, better technology, things like that. In the short run, we're going to see a few different things coming into play. Okay? So the short run, we're going to deal with this curve. Remember that we have in the short run. So I'm going to draw 2 graphs here. And remember, we had our short run aggregate supply looking something like this. Right? And, what were our axes on these graphs? We have our price level. Remember, price level throughout the economy and real GDP, the quantity of goods and services being produced in the economy. Same thing over here. Okay? So when we talk about shifting these curves, we're going to use that same idea of something good happening for short run aggregate supply, something bad happening for short run aggregate supply. Right? So let's start over here with something good happening. Right? If something good happens, what's going to happen? We're going to shift to the right. Right? We say good things shift our curve to the right. And if that's our first curve, well our new curve is going to be somewhere over here, right? Somewhere to the right. And if something bad happens for short run aggregate supply, well, we're going to shift that curve to the left. So it would go this way, and we would have our new short run aggregate supply somewhere to the left. So if this is aggregate 1 and here's 2. Right? So that's something you should be familiar with from when we were shifting curves earlier in the course, right? But now, we're going to be dealing with it on the aggregate level. So let's see what could be some of the reasons that this short run aggregate supply could shift to the left or to the right. Cool? Let's pause here and do that.

Shifting SRAS

Alright. So now let's see the different things that can affect our short-run aggregate supply and cause it to shift right or to the left. Now in the top table, it should look familiar to what we saw with long-run aggregate supply. These are factors of production. The availability of factors of production resources is going to affect us in the short run as well as in the long run. So you can imagine if there's an influx of labor into the economy, that's going to shift us to the right in the short run but also affect the long run because there's more availability of resources, right? So, in this top graph, it's very similar to what we see in the long run and both of those curves are going to be affected by these types of ideas. So labor, if we have, you know, again immigration into the country, immigration to the US. So this would shift us to the right. Right? A good example. Something that's increasing the supply in the short run and a bad would shift it to the left. So, immigration to the US would increase it just like before. And immigration from the US, well, let's do a different example here. What about something with the natural rate of unemployment? If the rate of unemployment goes up, well, that would be bad, right? Because there's less labor available. If the rate of unemployment increases, well, there's less labor available so that would decrease our short-run aggregate supply.

How about physical and human capital? Now, I lump these together because if there's just more of it, it's a good thing. If there's less, it's a bad thing, right? More physical capital, more human capital, people being smarter, That's a good thing and it'll shift us to the right. How about natural resources? Again, this is something where if we have more natural resources, it's going to shift us to the right and less is going to shift us to the left. Right? We have a new oil reserve. We've started using some new protected land that had a bunch of trees on it and now all of a sudden we can chop them down. Well, that would be good for our short-run aggregate supply. And technology, again, whenever there's new technology, this is going to be good. And a bad example, well, again with technology, we generally just see increases. It's hard to have decreases in technology. But it would have to be some sort of catastrophe that would be decreasing our technology in general. Alright? So those are our factors of production. Very similar to what affects our long-run aggregate supply curve. Curve. But in the short run, there are also expectations. Expectations are also going to be affecting our curve here. So if we have expectations of the future price level, so this isn't the current price level. If we think the price level is going to change in the future, so now firms are saying, we see price levels our analysis looks like it's going to increase in the future. Well, that's a good thing. They're going to start producing more to be able to meet that demand at those higher prices. They want they wanna be able to produce more to have enough ready to meet those higher prices. Right? So that would be an increase to the short-run aggregate supply when they expect higher future price levels because it means higher profit with higher prices.

And it'll be a shift to the left if they expect future price levels to decrease. Now, a supply shock. A supply shock, well, this is an unexpected event. So this is an unexpected thing that happens. So maybe we unexpectedly find some new key resource, right? Some oil deposit. Find an oil deposit. Well, that could be a good thing for our aggregate supply, right? Because many businesses use oil and now there's more available which brings down the prices of oil and it'll shift to the right, right? It brings down the cost for the economy or if there's some sort of loss of a key resource or spike in the price, right? Some sort of scarcity. Scarcity. That would be a bad thing, right? So this is an unexpected event that's going to affect us immediately in the short run.

And finally, an adjustment for past expectations. So maybe we had some expectation in the past about the future price level, right? So in the past, this is going to be the opposite of our current expectations. So maybe in the past, we expected the price levels to decrease, right? So we had shifted to the left. Our short-run aggregate supply had shifted to the left. There was less production because of the lower expected price but then the price didn't lower as much. So now, we're adjusting back up. So, unfound lower price expectations would shift us back to the right because previously, we had shifted to the left, right? This would have shifted us to the left and now we're shifting back to the right when those previous expectations weren't met. So this is when other when previous expectations aren't met. And this would be unfound higher prices, right? Because we had previously increased our production and now we're adjusting for what actually happened. Okay? Would shift us back to the left. So these are things that could shift our short-run aggregate supply. Let's go ahead and see how all of this works together. Let's do.

Here’s what students ask on this topic:

What factors can cause the short-run aggregate supply (SRAS) curve to shift to the right?

Several factors can cause the SRAS curve to shift to the right, indicating an increase in aggregate supply. These include:

• Increased Labor: An influx of labor, such as through immigration, increases the workforce available for production.
• Technological Advancements: Improvements in technology enhance productivity and efficiency.
• More Physical and Human Capital: Investments in machinery, infrastructure, and education improve production capabilities.
• Availability of Natural Resources: Discovering new resources or better utilizing existing ones can boost supply.
• Positive Expectations: If firms expect higher future price levels, they may increase production to meet anticipated demand.

How do expectations about future price levels affect short-run aggregate supply?

Expectations about future price levels significantly influence SRAS. If firms expect future price levels to rise, they anticipate higher profits and increase production to meet the expected higher demand, shifting the SRAS curve to the right. Conversely, if firms expect future price levels to fall, they may reduce production to avoid excess supply and lower profits, shifting the SRAS curve to the left. These expectations can lead to proactive adjustments in production levels, impacting the overall supply in the short run.

What is a supply shock, and how does it affect short-run aggregate supply?

A supply shock is an unexpected event that suddenly changes the availability or cost of key resources, impacting production. A positive supply shock, such as discovering a new oil reserve, increases resource availability and reduces costs, shifting the SRAS curve to the right. A negative supply shock, like a natural disaster that destroys crops, reduces resource availability and increases costs, shifting the SRAS curve to the left. These shocks can cause immediate and significant changes in aggregate supply.

How do changes in the natural rate of unemployment affect short-run aggregate supply?

Changes in the natural rate of unemployment directly impact SRAS. An increase in the natural rate of unemployment means fewer people are available to work, reducing the labor force and shifting the SRAS curve to the left. Conversely, a decrease in the natural rate of unemployment increases the labor force, enhancing production capacity and shifting the SRAS curve to the right. These changes affect the overall supply of goods and services in the short run.

What role do physical and human capital play in shifting the short-run aggregate supply curve?

Physical and human capital are crucial in determining the SRAS. Physical capital includes machinery, infrastructure, and technology, while human capital refers to the skills and education of the workforce. Increases in physical capital, such as new machinery or better infrastructure, enhance production capacity, shifting the SRAS curve to the right. Similarly, improvements in human capital, through education and training, increase worker productivity, also shifting the SRAS curve to the right. Conversely, reductions in these capitals can shift the SRAS curve to the left.