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3.2.6 Shifts of the SRAS curve

  1. The Price Level (PL) of an economy is not the only factor that affects its short-run aggregate supply (SRAS).
  2. While changes in the PL cause movements along the SRAS curve, changes in the determinants of short-run aggregate supply shift the SRAS curve.
Definition

Determinants of short-run aggregate supply

Factors that shift the SRAS curve.

The determinants of SRAS covered in the IB curriculum are:

  1. Costs of factors of production.
  2. Indirect taxes.

Note

The most important thing to note in this topic is that:

  1. Changes in price level cause changes the quantity of real GDP produced (causing a movement along the SRAS curve).
  2. Changes in the determinants of SRAS lead to changes in the quantity of real GDP produced at all possible price levels (causing a shift of the SRAS curve).
    1. A rightward shift indicates that at all given price levels, the total quantity of real GDP produced increases.
    2. A leftward shift indicates that at all given price levels, the total quantity of real GDP produced decreases.
Figure 1: movements versus shifts of the short-run aggregate supply curve
Figure 1: movements versus shifts of the short-run aggregate supply curve

Exam technique

In IB Economics long-answer questions, it is very important to explain processes step-by-step, without skipping any steps.

In this section, the effect of changes in the determinants of SRAS will be explained in such way.

Costs of factors of production

Increase in the costs of factors of production → leftward shift in SRAS

  1. Factors of production refer to the resources used in the production process (land, labour, capital, entrepreneurship).
  2. If the costs of these factors increase (higher wages, rising raw material prices...), production becomes more expensive for firms.
  3. As a result, to maintain profit margins, firms across the economy decrease their production at all possible price levels.
  4. Since short-run aggregate supply (SRAS) reflects the total output (real GDP) firms produce at different price levels...
  5. An increase in production costs reduces SRAS at all price levels, and shifts the SRAS curve to the left (SRAS1→SRAS2).
Figure 2: leftward shift of the SRAS curve
Figure 2: leftward shift of the SRAS curve

Decrease in the costs of factors of production → rightward shift in SRAS

  1. Factors of production refer to the resources used in the production process (land, labour, capital, entrepreneurship).
  2. If the costs of these factors decrease (lower wages, falling raw material prices...), production becomes cheaper for firms.
  3. As a result, seeking greater profit margins, firms across the economy increase their production at all possible price levels.
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