Short-run aggregate supply can move even when the economy’s productive capacity is unchanged. For AP Macro, focus on how changing production costs—especially inflationary expectations—shift the entire SRAS curve.

Core idea: SRAS shifts when per-unit costs change

The SRAS curve shifts when firms’ costs of producing each unit of output change at every price level. If it becomes cheaper to produce, firms are willing to supply more real output at each price level.

A shift is different from a movement along SRAS:

• Movement along SRAS: caused by a change in the price level (holding costs and expectations constant)

• Shift of SRAS: caused by a change in costs or expected inflation

Direction of shifts (what to memorise)

This paired AD–AS figure shows how a rightward SRAS shift (lower per-unit costs, such as higher productivity) increases real GDP and lowers the price level, while a leftward SRAS shift (higher input prices) reduces real GDP and raises the price level. It reinforces the exam distinction between SRAS shifting due to economy-wide cost changes versus moving along SRAS due to a change in the price level. Source

Cost increases shift SRAS left

If firms face higher per-unit production costs, SRAS shifts left (or up):

• Firms supply less at each price level because profit per unit falls.

Cost decreases shift SRAS right

If per-unit costs fall, SRAS shifts right (or down):

• Firms supply more at each price level because profit per unit rises.

Main shifters of SRAS: production costs

Input prices (especially wages and key resources)

Changes in the prices of inputs used across the economy shift SRAS:

• Wages and salaries (a major cost for most firms)

• Commodity and energy prices (oil, natural gas, electricity)

• Raw materials and intermediate goods (metals, lumber, components)

• Imported inputs (their domestic currency cost can change even if foreign prices do not)

Cost increases push SRAS left; cost decreases push SRAS right.

Government actions that change business costs

Some policies directly change firms’ production costs and therefore SRAS:

• Indirect business taxes (e.g., payroll taxes, excise taxes on inputs) increase costs → SRAS left

• Subsidies lower effective costs → SRAS right

• Regulation and compliance costs (when they raise per-unit costs) → SRAS left

In AP terms, these are SRAS shifters when they affect costs broadly across the economy rather than just one small market.

Productivity and technology (cost per unit of output)

Although often associated with long-run growth, productivity changes can shift SRAS in the short run because they change unit costs:

• Higher productivity (more output per worker-hour) lowers cost per unit → SRAS right

• Lower productivity (disruptions, inefficiencies) raises cost per unit → SRAS left

Think of productivity as changing how much real output firms can profitably supply at each price level, given wage contracts.

Inflationary expectations as a key SRAS shifter

Expected inflation and wage-setting

If workers and firms expect higher inflation, they are more likely to build higher wages and prices into contracts. This raises firms’ costs even before actual inflation occurs, shifting SRAS.

How it shifts SRAS:

• Higher expected inflation → higher nominal wage demands and input prices → SRAS left

• Lower expected inflation → slower wage growth and input cost pressure → SRAS right

In the AP model, this is often described as firms’ costs rising because they must pay more for inputs due to revised expectations.

“Supply shocks” as short-run cost changes

A supply shock is a sudden event that changes economy-wide production costs:

• Negative shocks (natural disasters, supply chain disruptions, sharp energy price spikes) raise costs → SRAS left

• Positive shocks (sudden input price drops, rapid efficiency gains) lower costs → SRAS right

The exam typically treats these as SRAS shifts because they change costs at all price levels.