7.5 DETERMINANTS OF SRAS

Explaining the upwards slope of the SRAS curve

2 microeconomic assumptions about the nature of firms; All firms aim to maximise profit In the short run, the cost of producing extra units of output increases as firms produce more output

Deflation

A continuing fall in the price level

AD moving outwards (effect on real GDP)

A shift in AD where the SRAS curve is flatter - the resulting increase in real output is proportionally greater than the increase in price level A shift in AD where the SRAS curve is steep - Most of the effect of the increase in AD falls on the price level rather than real output (effect is inflationary)

Long-run aggregate supply

AS when the economy is producing at its production potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right

Short-run aggregate supply

AS when the level of capital is fixed, though the utilisation of existing factors of production can be altered so as to change the level of real output

What would cause SRAS curve to shift right

Fall in business's costs of production; e.g. raw materials, energy Fall in unit labour costs, resulting from a fall in wage costs or an increase in labour productivity Reduction in indirect taxes, such as VAT Increase in subsidies granted to firms by the govt Technical progress which improves the quality and productivity of capital goods

Technical progress

New and better ways of doing things