Aggregate supply and short-run AS

The AS curve

Draw the price level on the vertical axis and real national output on the horizontal axis.

The short-run AS (SRAS) curve slopes upwards: in the short run, some costs (especially money wages) are fixed, so a higher price level makes extra output more profitable and firms supply more.

Movements and shifts

• A change in the price level (caused by a shift in AD) is a movement along SRAS.
• A change in costs of production at every price level shifts SRAS. Lower costs shift it right (down); higher costs shift it left (up).

Factors shifting SRAS

• Costs of raw materials and energy: oil, gas, metals and food prices; a rise shifts SRAS left.
• Exchange rates: a depreciation makes imported raw materials and components dearer, shifting SRAS left; an appreciation lowers import costs.
• Tax rates: higher indirect taxes (VAT, excise duties) or business taxes raise costs and shift SRAS left; subsidies shift it right.
• Money wage rates and labour costs also shift SRAS.

Worked example

Describe how to show a fall in world oil prices on an AD/AS diagram and its effects.

1. Draw AD sloping down and SRAS1 sloping up; label equilibrium P1, Y1.
2. Lower energy costs shift SRAS right to SRAS2.
3. New equilibrium: lower price level P2 and higher real output Y2.

Answer: SRAS shifts right: price level falls, real output rises.

Check yourself

1. Which would shift SRAS to the left?
   • A rise in VAT
   • A fall in oil prices
   • An appreciation of the currency
   • A cut in money wages
   Show answer

   A rise in VAT. Higher indirect tax raises firms' costs at every price level.

2. An increase in AD leads to
   • a leftward shift of SRAS
   • a rightward shift of SRAS
   • a movement up along SRAS
   • no change in output
   Show answer

   a movement up along SRAS. The price level rises and firms supply more along the curve.

3. A depreciation of a country's currency affects SRAS by
   • raising the cost of imported inputs, shifting SRAS left
   • lowering import costs, shifting SRAS right
   • shifting LRAS only
   • having no effect
   Show answer

   raising the cost of imported inputs, shifting SRAS left. Imported raw materials cost more in domestic currency.

4. SRAS shifts right while AD is unchanged. What happens?
   • The price level rises and real output falls
   • The price level and output rise together
   • The price level falls and output falls
   • The price level falls and real output rises
   Show answer

   The price level falls and real output rises. Move down along AD to a new equilibrium.

5. Why does SRAS slope upwards?
   • Higher prices reduce costs
   • Some costs such as money wages are fixed in the short run, so higher prices raise profit margins
   • Consumers demand more at higher prices
   • LRAS is vertical
   Show answer

   Some costs such as money wages are fixed in the short run, so higher prices raise profit margins. With fixed costs, higher selling prices encourage more output.

6. A tax of $3 per unit is replaced by a subsidy of $1 per unit. By how much do firms' costs per unit fall, in $?
   Show answer

   $4. Removing the $3 tax cuts costs by $3 and the subsidy cuts them by another $1: $4.

7. Explain, with reference to an AD/AS diagram, the effect of higher world energy prices on the price level and real output.
   Show answer

   Higher energy prices raise firms' costs so SRAS shifts left; the price level rises and real output falls.. Costs up, SRAS left, P up, Y down.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2 (June 2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.