AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/3/3-3)
Unit 3 · Topic 3.3
3.3 Short-Run Aggregate Supply (SRAS)
Short-run aggregate supply (SRAS) shows how much real output all firms together will produce at each price level while some wages and prices are slow to adjust. It slopes upward because of those sticky wages and prices. Anything that changes the cost of production across the economy shifts it.
Key terms
- short-run aggregate supply (SRAS)
- sticky wages and prices
- input prices
- inflationary expectations
- supply shock
The short run and sticky wages
In macroeconomics, the short run is the period when some input prices, especially wages, are fixed or slow to change. Workers often have contracts or set salaries, and firms don't rewrite pay every month. Some output prices are sticky too, because changing them costs time and money (menu costs).
The long run is the period long enough for all wages and prices to fully adjust. That difference drives everything in 3.3 to 3.7.
Why SRAS slopes upward
On the AD–AS graph (price level on the vertical axis, real GDP on the horizontal axis), SRAS slopes upward.
Here's the logic. Suppose the price level rises but wages are stuck at their old level for a while. Each unit firms sell now brings in more revenue, while their labor costs per worker haven't changed. Producing more becomes profitable, so firms raise output and hire more workers. When the price level falls with wages stuck, the opposite happens: output and hiring fall.
Moving along SRAS: the short-run trade-off
Picture the economy sliding up its SRAS curve: prices are rising and firms are making more. To make more, they hire. If the labor force is the same size, every extra hire comes out of the pool of unemployed people, so the unemployment rate drops. Slide back down and the reverse happens. So in the short run, faster inflation tends to go with lower unemployment, and slower inflation with higher unemployment.
That trade-off is what the short-run Phillips curve (5.2) shows. In the long run, it disappears (3.4).
What shifts SRAS
Any change in the cost of producing output across the economy shifts SRAS. Higher costs shift it left (less output at each price level). Lower costs shift it right.
- Input prices: nominal wages, energy (oil, natural gas), and raw materials. A spike in oil prices is the classic negative supply shock.
- Productivity: when workers or machines produce more per hour, cost per unit falls and SRAS shifts right.
- Business taxes, subsidies and regulations: higher business taxes or costly regulations shift SRAS left; subsidies shift it right.
- Inflationary expectations: if workers and firms expect higher inflation, workers push for higher wages and firms raise prices, so costs rise and SRAS shifts left. Lower expected inflation shifts it right.
- Supply shocks: sudden events like a drought, a pandemic shutting factories, or a sharp drop in energy prices. A shock that raises costs is negative (left); one that lowers costs is positive (right).
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Shift SRAS or not?
Say whether each event shifts SRAS right, shifts it left, or doesn't shift it: (1) world oil prices double; (2) workers and firms come to expect higher inflation next year; (3) new software raises productivity across many industries; (4) the price level rises because AD increased; (5) consumers become more optimistic.
Show the solutionHide the solution
- Step 1: (1) Energy is an input almost every firm uses, so costs rise: SRAS shifts left.
- Step 2: (2) Workers bargain for higher wages and firms raise prices to keep up, so costs rise: SRAS shifts left.
- Step 3: (3) Higher productivity lowers cost per unit: SRAS shifts right.
- Step 4: (4) A change in the price level caused by AD is a movement along SRAS, not a shift. Output rises along the curve.
- Step 5: (5) Consumer optimism changes spending, which shifts AD, not SRAS.
Answer: (1) Left. (2) Left. (3) Right. (4) No shift; movement up along SRAS. (5) No SRAS shift; AD shifts right.
- Example 2
Reading the trade-off
AD increases, and the economy moves up along an unchanged SRAS curve. What happens to the price level, real GDP, employment and the unemployment rate in the short run?
Show the solutionHide the solution
- Step 1: Moving up SRAS means a higher price level.
- Step 2: Higher on SRAS also means more real output, because sticky wages make extra production profitable.
- Step 3: More output needs more workers, so employment rises.
- Step 4: With the labor force unchanged, more people working means the unemployment rate falls.
Answer: The price level rises, real GDP rises, employment rises and the unemployment rate falls.
Common mistakes
- Shifting SRAS when the price level changes. That's a movement along SRAS.
- Shifting SRAS for a change in consumer or government spending. Those shift AD.
- Getting inflationary expectations backward. Higher expected inflation shifts SRAS left, not right.
- Explaining the upward slope with "firms want higher prices." The reason is sticky wages: output prices rise faster than input costs in the short run.
On the exam
- Free-response questions often describe a cost change (energy prices, wages, productivity) and ask you to show the effect on SRAS and on the price level, output and unemployment.
- If a question mentions expected inflation, connect it to SRAS here and to the short-run Phillips curve in 5.2.
Connected topics
Videos
Check yourself
4 questions on 3.3 Short-Run Aggregate Supply (SRAS). Pick an answer to see if you got it, and why.
The short-run aggregate supply curve slopes upward mainly because
A sharp rise in the world price of oil, a key input for many firms, would shift which curve and in which direction?
Workers and firms come to expect higher inflation next year, so workers negotiate higher nominal wages. What is the most likely effect on the economy in the short run?
Holding the labor force constant, suppose the price level rises and the economy moves up along its short-run aggregate supply curve. Which of the following happens?
0 of 4 answered