Short Run Aggregate Supply Curve

The Short-Run Aggregate Supply or SRAS curve, shows the total output that firms are willing to supply at different price levels.

The reason the SRAS curve slopes upward is that prices and input costs adjust differently in the short run. Some production costs cannot be adjusted quickly, so input costs such as wages are assumed to remain fixed.

This is because labor contracts typically take time to be modified, so wages do not change immediately.

For example, consider a car manufacturer. If the market price of cars rises but workers’ wages stay fixed by an annual contract in the short run, the firm’s profit margins increase on every car it sells. This encourages the firm to produce more.

The same logic applies to many firms across the economy.

When the overall price level rises, firms receive higher prices, leading to higher profits and encouraging them to increase production, raising total output in the economy. However, this increase in output does not continue at the same rate.

As firms increase production, some costs rise gradually, so output continues to increase, though at a slower rate. This gives the SRAS curve its upward-sloping shape.