Aggregate supply is the other side of the model: how much firms are willing to produce. In the short run, wages and other costs are stuck where they are, so firms respond to higher prices by producing more. That one fact is what gives SRAS its upward slope.
📚 What you need to know
Aggregate supply (AS) is the total output firms are willing and able to produce at each average price level.
The short run is the period in which wages and other factor prices are sticky — they do not adjust yet.
The long run is the period in which wages and factor prices are fully flexible.
SRAS slopes upwards: if prices rise while costs stay put, each extra unit is more profitable, so firms supply more.
A change in the price level causes a movement along SRAS (extension or contraction).
SRAS shifts when costs of production or indirect taxes change: lower costs shift it right, higher costs shift it left.
What “short run” actually means here
In macro, “short run” is not a number of months. It is defined by whether costs have caught up. Wages are set in contracts, rents are fixed for a year, energy is bought on long deals. While those are locked in, a rise in the price of the things firms sell is pure extra profit margin.
The idea in one line
Prices of output rise + costs stay the same → bigger margins → firms produce more
That is why SRAS is upward sloping. There is a second, simpler reason too: aggregate supply is just the sum of every firm’s supply curve, and individual supply curves slope upwards.
Movement along the SRAS curve
If the only thing that changes is the average price level, you stay on the same curve and slide up or down it.
Watch the dashed lines: they always run from the curve straight across to the price axis and straight down to the output axis. Neat dashed lines pick up easy marks.
Shifts of the whole SRAS curve
SRAS shifts when something changes the cost of producing each unit. Two causes are in the syllabus:
Changes in the costs of raw materials, energy and labour. Cheaper oil, lower wages or a stronger currency (which makes imported inputs cheaper) all cut costs.
Changes in indirect taxes. A tax on production behaves exactly like a cost. Raise it and SRAS shifts left; cut it and SRAS shifts right.
SRAS shifts change how much is produced at today’s prices. They do not change what the economy is capable of producing — that is the job of LRAS.
Change
Why it matters to firms
Effect on SRAS
Oil or energy prices rise
Transport, heating and plastics all cost more per unit
Shifts left
Wage rates rise faster than productivity
Labour cost per unit of output goes up
Shifts left
The currency depreciates
Imported raw materials become more expensive
Shifts left
Indirect taxes are cut
Less tax to pay on each unit sold
Shifts right
Raw material prices fall
Each unit is cheaper to make
Shifts right
Government cuts red tape for firms
Compliance costs per unit fall
Shifts right
Careful with the exchange rate. A depreciation shifts SRAS left (imported inputs cost more) but shifts AD right (exports get cheaper). Two curves move at once. Saying so is exactly the kind of point that lifts an answer into the top band.
A quick test for any event: does it change what firms pay to make a unit, or what buyers want to buy? Costs go to the AS side. Wanting goes to the AD side.
Worked example
WORKED EXAMPLE
A sharp rise in global energy prices
A country imports almost all of its energy. World energy prices double in a year. Using an AD/AS diagram, explain what happens to output and the average price level in the short run.
Step 1: which curve?Energy is a cost of production for every firm. This is a supply-side shock, so SRAS moves.Step 2: which direction?Costs rise → SRAS shifts left, from SRAS₁ to SRAS₂Step 3: read off the new equilibriumAD is unchanged, so the new intersection is higher up and to the leftPrices rise and real output fallsRising prices with falling output at the same time is called stagflation — a nasty combination, because fixing one usually worsens the other.
💡 Exam tip
Always say why SRAS slopes upwards: costs are sticky in the short run, so higher prices mean higher margins.
Label the curve SRAS, not just AS, whenever you are talking about the short run. The distinction is worth marks.
If the question mentions oil, wages, the exchange rate or indirect taxes, it is almost always testing an SRAS shift.
Draw the shift as a parallel line and add an arrow showing the direction.
Look out for events that shift two curves. Saying so shows real understanding.
State the effect on both variables: the price level and real output.
⚠️ Common mix-up
Treating a price level change as an SRAS shift. The price level is on the axis, so it can only cause a movement along the curve.
Mixing up SRAS and LRAS shifts. SRAS is about costs today. LRAS is about productive capacity.
Thinking a subsidy to firms is an AD change. It lowers costs, so it shifts SRAS right.
Forgetting indirect taxes. Students remember wages and oil but leave out taxes, which is half the syllabus point.
Drawing SRAS as a vertical line. That is the classical long-run curve, not the short-run one.
Assuming higher wages always shift SRAS left. If productivity rises by more, cost per unit can still fall.
Up next: Competing Views of Aggregate Supply — why classical and Keynesian economists draw the long-run curve in two completely different shapes, and why it changes the policy advice.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
