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IB DP Economics — Unit 3: Macroeconomics | SL | 3.2 Variations in Economic Activity — Aggregate Demand and Aggregate Supply
📋 What You Will Learn
- Define short-run aggregate supply (SRAS) and explain why it slopes upward
- Identify and explain the determinants that shift the SRAS curve
- Distinguish between a movement along the SRAS curve and a shift of the curve
- Analyse the macroeconomic effects of SRAS shifts on the price level and real GDP
- Apply SRAS analysis to real-world supply shocks and policy contexts
- Evaluate the significance of SRAS shifts for inflation, unemployment, and economic growth
🔍 Guiding Question Why does the ability of an economy to produce goods and services change in the short run, and what are the consequences for the price level and real output when it does?
🌍 Why This Matters In 2022, Russia's invasion of Ukraine triggered a global energy price shock that cut the productive capacity of economies worldwide — factories faced soaring input costs, supply chains fractured, and inflation surged to 40-year highs across Europe and North America. This was not a demand-side story. It was a leftward shift of the SRAS curve: the same level of output now cost more to produce, pushing up the price level while real GDP fell. Understanding SRAS is understanding why economies can simultaneously suffer rising prices and falling output.
What Is Short-Run Aggregate Supply?
Aggregate supply describes the total quantity of goods and services that all producers in an economy are willing and able to supply at different price levels. In the short run, some costs of production — particularly wages and the prices of other inputs — are assumed to be fixed by contracts or convention. This creates a specific relationship between the price level and the quantity of real output supplied.
📖 Definition — Short-Run Aggregate Supply (SRAS) Short-run aggregate supply (SRAS) is the total quantity of real output (real GDP) that all producers in an economy are willing and able to supply at each price level, in the short run, when the prices of at least some factors of production — particularly wages — are fixed.
📖 Definition — The Short Run (Macroeconomics) In macroeconomics, the short run is the period during which the prices of factors of production (especially wages) are sticky — they do not adjust immediately to changes in the price level. This is distinct from the microeconomic short run (where at least one factor is fixed in quantity).
Why Does the SRAS Curve Slope Upward?
The positive slope of the SRAS curve is the result of a specific macroeconomic logic: when the overall price level rises, firms find that the prices they receive for their output have increased while their input costs (especially wages, which are fixed in the short run) have not yet risen proportionally. This raises profit margins and incentivises firms to expand output.
- Higher price level → higher revenues for firms — if wages and other input costs are fixed, profit margins widen
- Wider profit margins → incentive to produce more — firms hire more workers, extend hours, use capacity more intensively
- Result: as the price level rises, real GDP supplied increases — hence the