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Abreviated Supply Curve in the Short Term: Characteristics, Factors Influencing, and Possible Adjustments

Economy's short-term output (real GDP) at varying price levels is determined by the concept of Short-run Aggregate Supply (SRAS). Unlike other factors, this key economic principle does not apply to the quantity of goods and services produced in the long run.

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Abridged Analysis: Short-Term Aggregate Supply - Understanding Curve, Factors, and Changes
Abridged Analysis: Short-Term Aggregate Supply - Understanding Curve, Factors, and Changes

Abreviated Supply Curve in the Short Term: Characteristics, Factors Influencing, and Possible Adjustments

In the world of economics, understanding aggregate supply curves is crucial to grasping the factors that influence a country's overall production and price levels. These curves can be divided into two categories: short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS).

The short-run aggregate supply curve, represented by an upward slope on a graph with the X-axis representing aggregate output and the Y-axis representing the price level, is affected by various non-price determinants such as input prices, future price expectations, business taxes, production subsidies, exchange rates, labor supply and quality, capital stock and quality, technology, and other factors.

In the short run, aggregate supply is positively related to the price level. An increase in the price level increases aggregate supply, and vice versa. This is primarily due to several costs, such as wages, being inflexible in the short term, a phenomenon known as wage rigidity. Examples of companies with high wage rigidity include General Motors, which significantly influences the SRAS curve.

Wage rigidity can be caused by factors such as employment contracts, minimum wage, labour market regulations, and union's bargaining power. This rigidity is the reason for the upward slope of the SRAS curve.

However, in the long run, the aggregate supply curve forms a vertical line because changes in the price level do not affect aggregate output. This is because, in the long run, all inputs are variable. The long-run aggregate supply curve is affected by changes in the quantity and quality of the factors of production, such as more advanced technology or increased physical capital.

Changes in input costs, such as raw material prices, nominal wages, taxes, subsidies, and exchange rates, only affect the short-run aggregate supply but not the long-run aggregate supply. In the long run, input costs will rise and fall in proportion to changes in the price level.

It's important to note that changes in the price level only impact short-run aggregate supply, not long-run aggregate supply. Changes in the price level affect profit margins and ultimately affect business decisions related to increasing or decreasing production.

In the short run, input costs adjust proportionately, so the profit margin does not change, and firms have no incentive to increase production or decrease production. However, in the long run, these adjustments occur, leading to changes in the LRAS curve.

Understanding these aggregate supply curves is essential for policymakers, businesses, and economists alike, as it provides insights into how economic factors influence production and price levels, both in the short and long term.

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