Short-run AS — Edexcel A-Level Economics A
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Short-run AS explained
Short-run aggregate supply shifts when the costs of production change at any given price level.
Read the full explanation
A rise in the costs of raw materials and energy, such as higher oil or metal prices, raises unit costs and shifts SRAS left, reducing real output and raising the price level. A depreciation of the exchange rate raises the domestic currency price of imported raw materials and components, so import costs rise and SRAS shifts left; an appreciation lowers import costs and shifts SRAS right. Changes in tax rates affect costs directly: a rise in corporation tax or employer National Insurance contributions raises firms' costs and shifts SRAS left, while a cut shifts it right. Subsidies and indirect taxes such as VAT also alter costs and therefore SRAS. The key distinction is that these factors shift the SRAS curve, whereas a change in the price level causes movement along it.
Your focus
- Identify the factors that shift short-run aggregate supply.
- Explain how changes in raw material and energy costs, exchange rates and tax rates affect SRAS.
- Analyse the effect of an SRAS shift on real output and the price level using a diagram.
Short-run AS exam tips
Marking Points
- A rise in raw material or energy costs raises unit costs of production and shifts SRAS to the left, lowering real output and raising the price level.
- A fall in raw material or energy costs shifts SRAS to the right, increasing real output and lowering the price level.
- A depreciation of the exchange rate raises the price of imported raw materials and components, increasing costs and shifting SRAS left.
- An appreciation of the exchange rate lowers import prices, reducing costs and shifting SRAS right.
- A rise in tax rates on firms, such as corporation tax or employer National Insurance contributions, raises costs and shifts SRAS left.
- A cut in tax rates or an increase in subsidies lowers costs and shifts SRAS right.
- A change in the price level causes a movement along the SRAS curve, not a shift of it.
Examiner Tips
- 💡State the direction of the shift explicitly, for example 'SRAS shifts left', and then give the effect on real output and the price level.
- 💡Use a diagram with price level on the vertical axis and real output on the horizontal axis, showing the SRAS shift and the new equilibrium.
- 💡Distinguish clearly between cost-push factors that shift SRAS and demand-side factors that shift AD.
Common Mistakes
- Confusing a shift of SRAS with a movement along it. Correction: cost changes shift the curve, while a change in the price level causes movement along it.
- Assuming a depreciation always benefits the economy. Correction: a depreciation raises import costs and shifts SRAS left, though it may also raise export demand.
- Treating all taxes as affecting aggregate demand only. Correction: taxes on firms, such as corporation tax and employer National Insurance contributions, are costs of production and shift SRAS.
- Ignoring the direction of exchange rate effects. Correction: appreciation lowers import costs and shifts SRAS right, while depreciation raises them and shifts SRAS left.