π Understanding Aggregate Supply Curves
Aggregate supply curves show the relationship between the price level and the quantity of goods and services supplied in an economy. We'll explore the key differences between the Short-Run Aggregate Supply (SRAS) and the Long-Run Aggregate Supply (LRAS) curves.
π§ Defining Short-Run Aggregate Supply (SRAS)
The SRAS curve illustrates how the total quantity of goods and services that firms are willing to supply varies with the price level in the short run. It is typically upward sloping.
- β±οΈ Sticky Wages and Prices: In the short run, wages and prices are often sticky, meaning they don't adjust immediately to changes in economic conditions.
- π Input Costs: Changes in input costs (like wages or raw materials) shift the SRAS curve.
- π Positive Relationship: A higher price level encourages firms to produce more, as their revenues increase faster than their costs.
π― Defining Long-Run Aggregate Supply (LRAS)
The LRAS curve represents the potential output of the economy when all resources are fully employed. It is typically vertical at the potential output level.
- π± Potential Output: The LRAS is determined by factors like technology, capital stock, and labor force.
- βοΈ Full Adjustment: In the long run, wages and prices fully adjust to changes in the economy.
- 𧱠Independence from Price Level: The LRAS is independent of the price level; changes in the price level do not affect long-run output.
π SRAS vs. LRAS: A Side-by-Side Comparison
| Feature |
Short-Run Aggregate Supply (SRAS) |
Long-Run Aggregate Supply (LRAS) |
| Slope |
Upward Sloping |
Vertical |
| Time Horizon |
Short Run (period where wages and prices are sticky) |
Long Run (period where wages and prices are fully flexible) |
| Determinants |
Input costs, productivity, expected price level |
Technology, capital, labor, natural resources |
| Wage/Price Flexibility |
Sticky |
Flexible |
| Relationship with Price Level |
Positive relationship |
Independent |
| Policy Implications |
Fiscal and monetary policies can affect output |
Fiscal and monetary policies primarily affect the price level |
| Example Scenario |
A sudden increase in oil prices shifts SRAS to the left, causing stagflation. |
Technological advancements shift LRAS to the right, increasing potential output. |
π Key Takeaways
- π SRAS is influenced by short-term factors like input costs and sticky prices, while LRAS is determined by the economy's productive capacity.
- π± LRAS represents the economy's potential output when all resources are fully utilized.
- βοΈ Understanding the difference between SRAS and LRAS is crucial for analyzing macroeconomic policies and their effects on output and inflation.