Q: What is Aggregate Supply (AS)?
A: The total quantity of goods and services that firms are willing and able to produce at each price level in a given time period.
Q: Define Short-Run Aggregate Supply (SRAS).
A: The relationship between price level and real output when at least one factor of production is fixed and wages are sticky.
Q: Why is the SRAS curve upward sloping?
A: Because rising price levels increase profits when costs are sticky, incentivising firms to increase output.
Q: What does “ceteris paribus” mean in SRAS analysis?
A: All other factors (e.g. wages, costs, technology) are held constant when analysing the effect of price level changes.
Q: Explain the role of sticky wages in SRAS.
A: Wages adjust slowly due to contracts, so when prices rise faster than wages, real wages fall → firms hire more labour → output increases.
Q: Apply the law of diminishing returns to SRAS.
A: With fixed capital, adding more labour increases output at a decreasing rate → marginal costs rise → firms need higher prices to supply more.
Q: What causes a movement along the SRAS curve?
A: A change in the general price level only.
Q: What causes a shift in the SRAS curve?
A: Changes in production costs, taxes, technology, or external shocks.
Q: Give 3 examples of factors shifting SRAS.
A:
Input costs (e.g. oil prices)
Exchange rates
Taxes/regulation
Q: What happens to SRAS when raw material costs rise?
A: SRAS shifts left due to higher marginal costs → lower output at every price level.
Q: How does a fall in input prices affect SRAS?
A: Shifts SRAS right as firms can produce more profitably.
Q: How does currency appreciation affect SRAS?
A: Shifts SRAS right as imports become cheaper, reducing production costs.
Q: How does currency depreciation affect SRAS?
A: Shifts SRAS left due to higher import costs → cost-push inflation.
Q: How do indirect taxes affect SRAS?
A: Higher taxes shift SRAS left; lower taxes shift SRAS right.
Q: Why is LRAS vertical?
A: In the long run, all costs adjust, so output depends only on productive capacity, not price level.
Q: Key difference between SRAS and LRAS?
A:
SRAS: cost-driven, upward sloping
LRAS: capacity-driven, vertical
Q: Why does the economy move from SRAS to LRAS over time?
A: Wage adjustments and contract renegotiation remove profit gains, eliminating the incentive to produce above potential output.
Q: How do you calculate % change in GDP?
A:
New − Original / Original x 100
Q: If GDP falls from £2.2tn to £2.15tn, what happens?
A: Approx −2.3% fall → contraction due to SRAS shifting left.
Q: How did the Brexit referendum affect SRAS?
A: Pound depreciation increased import costs → SRAS shifted left.
Q: Why did inflation rise after 2016?
A: Higher import prices caused cost-push inflation.
Q: Why is this an example of stagflation?
A: Rising prices + falling output → classic SRAS left shift.
Q: Why might SRAS be more elastic in some economies?
A: Flexible labour markets, spare capacity, and weaker unions allow quicker output response.
Q: Why might SRAS be inelastic?
A: Capacity constraints, strong unions, or supply bottlenecks limit output increases.
