What is Short Run Aggregate Supply?

Short run aggregate supply is an economic concept that focuses on the factors that affect the amount of goods and services an economy can produce. It essentially measures the ability of a specific economy to produce these goods and services in the short term, as opposed to its contrasting concept, long run aggregate supply. Many factors can affect the short run aggregate supply, also known as SRAS, including the amount of demand, price changes, and the efficiency of workers. Measuring the SRAS is done in terms of the economy's price levels and income.

The concept of aggregate demand is a way for economists to measure the way an economy produces goods and services and the factors that affect that production. Short run aggregate supply assumes that the prices can change, but that all other factors that affect pricing and production, such as the wages of workers or available technology, do not change. Total planned output at each of these price levels will be reflected in the curve of the line on a graph that represents pricing and income levels.

Simply put, when the curve on the graph is rising, the short run aggregate supply is rising, and when the curve falls, it is contracting. Also important to the concept is the elasticity of the curve. The more elastic the curve, the more it demonstrates that there is spare, untapped potential in the economy to produce more. This means that the economy can respond quickly should the aggregate demand suddenly rise.

Another way of expressing this elasticity is in terms of the output gap, which is the gap between the economy's real and potential production. The more this gap is reduced and the economy approaches full capacity, the less the curve becomes elastic, which means that shortages of product can possibly occur. As the output expands, the efficiency of workers and productivity of machinery may also be lessened, which would raise the cost of production, affecting the SRAS.

Shifts in the curve of short run aggregate supply are possible because the concept's assumption that all other factors are static besides pricing is unfeasible in the real world. For example, rising costs in labor would affect the cost of production and, in turn, the short run aggregate supply. Government interference in the form of higher taxation could also contract SRAS, as would the rising or falling costs of raw materials like oil used in making various products. Economists study the changes on the curve caused by these underlying factors for useful lessons on the future of a given economy.