Question

illustrate and explain the sr and the lr curve as they teakte tk shifts in the sars curve

Answer 1

If either the aggregate supply or aggregate demand curve shifts in the aggregate demand/aggregate supply—AD/AS—model, the original equilibrium in the AD/AS diagram will shift to a new equilibrium.

If the aggregate supply—also referred to as the short-run aggregate supply or SRAS—curve shifts to the right, then a greater quantity of real GDP is produced at every price level. If the aggregate supply curve shifts to the left, then a lower quantity of real GDP is produced at every price level. In this article, we'll discuss two of the most important factors that can lead to shifts in the SRAS curve—productivity growth and input prices.

In the long run, the most important factor shifting the SRAS curve is productivity growth. Productivity—in economic terms—is how much output can be produced with a given quantity of labor. One measure of this is output per worker, or GDP per capita.

Over time, productivity grows so that the same quantity of labor can produce more output. Historically, the real growth in GDP per capita in an advanced economy like the United States has averaged about 2% to 3% per year, but productivity growth has been faster during certain extended periods.

A higher level of productivity shifts the SRAS curve to the right because with improved productivity, firms can produce a greater quantity of output at every price level.

TThe two AD/AS diagrams below show shifts in productivity over two time periods. We'll start by looking at the first period—analyzed in Diagram A—where productivity increases, shifting the SRAS curve to the right from SRAS0 to SRAS1 to SRAS2 reflecting the rise in potential GDP in this economy. The equilibrium shifts from E0 to E1 to E2.

Shifts in aggregate supply

A shift in the SRAS curve to the right results in a greater real GDP and downward pressure on the price level if aggregate demand remains unchanged. However, if this shift in SRAS results from gains in productivity growth, which are typically measured in terms of a few percentage points per year, the effect will be relatively small over a few months or even a couple of years.

The aggregate supply curve can also shift due to shocks to input goods or labor. For example, an unexpected early freeze could destroy a large number of agricultural crops—a shock that would shift the SRAS curve to the left since there would be fewer agricultural products available at any given price.

Similarly, shocks to the labor market can affect aggregate supply. An extreme example would be an overseas war that requires a large number of workers to cease their ordinary production in order to go fight for their country. In this case, aggregate supply would shift to the left because there would be fewer workers available to produce goods at any given price.

The short-run aggregate supply curve (SRAS) lets us capture how all of the firms in an economy respond to price stickiness. When prices are sticky, the SRAS curve will slope upward. The SRAS curve shows that a higher price level leads to more output.

There are two important things to note about SRAS. For one, it represents a short-run relationship between price level and output supplied. Aggregate supply slopes up in the short-run because at least one price is inflexible. Second, SRAS also tells us there is a short-run tradeoff between inflation and unemployment. Because higher inflation leads to more output, higher inflation is also associated with lower unemployment in the short run.

The SRAS curve tells us that firms will respond to inflation by producing more. If you want to produce more, you will need to hire more workers, so the unemployment rate decreases. In this way, the SRAS captures the tradeoff between inflation and unemployment.

When the price level increases, producers are willing to make more and hire more workers because sticky wages make them a better bargain. On the other hand, when the price level decreases, producers are willing to make less because sticky wages make workers not as good of a deal and producers sell less.

The Short-Run Aggregate Supply Curve (SRAS)

An increase in SRAS

The SRAS curve shows that as the price level increases and you move along the SRAS, the amount of real GDP that will be produced in an economy increases.

An increase in the SRAS is shown as a shift to the right.

Remember the importance of labeling this model: price level (PLPLP, L) is on the vertical axis, and real GDP (or rGDPrGDPr, G, D, P) is on the horizontal axis. SRAS shows that the short-run relationship between price level and aggregate output is positive, so this should always be an upward sloping curve.