3.3 Short-Run Aggregate Supply

What is Short-Run Aggregate Supply?

Short-run aggregate supply (SRAS) shows the relationship between the price level and quantity of output firms produce when input prices (especially wages) are sticky and slow to adjust. SRAS slopes upward: as the price level rises, firms find it profitable to increase output because output prices rise faster than costs, boosting profits and encouraging more production.

Why SRAS Slopes Upward

Because nominal wages and other input costs are fixed in the short run, a higher price level means firms sell goods at higher prices while paying the same costs — increasing profit per unit. This incentivizes firms to raise output. Sticky wages/prices come from contracts, menu costs, and slow-to-adjust expectations, explaining the short-run positive slope.

Shifters of SRAS

SRAS shifts with changes in input costs: resource/input prices (wages, oil), productivity, business taxes/subsidies and regulations, and inflationary expectations. A decrease in input costs or a productivity increase shifts SRAS right (more output at every price level); higher input costs or negative supply shocks shift SRAS left.

Key terms

Short-Run Aggregate Supply (SRAS)

The relationship between price level and total output firms are willing to supply when input prices are sticky; slopes upward.

Why SRAS slopes upward

Sticky wages/input costs mean rising price levels increase firm profits, encouraging more output.

Sticky wages/prices

Input costs (especially wages) that adjust slowly due to contracts, menu costs, or slow expectation changes, causing the short-run upward slope of SRAS.

Shifters of SRAS

Input/resource prices, productivity, business taxes/subsidies/regulations, and inflationary expectations.

Negative supply shock

An unexpected event (e.g., oil price spike) that raises production costs and shifts SRAS left, raising price level and lowering output.

Try an AP-style question

Why does SRAS slope upward?

1. Taxes fall with output
2. Consumers buy more at high prices
3. Technology improves with price
4. Wages and input prices are sticky