AP Syllabus focus: ‘A positive SRAS shock raises output and employment but lowers the price level; a negative shock does the opposite.’
In the AD–AS model, short-run aggregate supply (SRAS) shocks change firms’ costs and profitability, shifting SRAS and altering real output, employment, and the price level in the short run.
Understanding SRAS shocks
What an SRAS shock is
SRAS shock: An unexpected change in production conditions (especially economy-wide costs or productivity) that shifts the short-run aggregate supply curve left or right.
SRAS shocks are often called supply shocks because they originate on the production side of the economy rather than from changes in total spending. In the short run, many input costs do not instantly adjust, so firms respond by changing output and prices.
Common sources of SRAS shocks
A shock can be triggered by changes such as:
Input prices (oil, natural gas, raw materials, imported components)
Nominal wages and benefit costs
Productivity and technology (efficiency gains or losses)
Taxes and regulation that raise or lower per-unit production costs
Inflation expectations that affect wage-setting and pricing decisions
Supply chain disruptions or sudden improvements in logistics
Positive SRAS shocks (SRAS shifts right)
A positive SRAS shock means firms can produce more at each price level (lower per-unit costs and/or higher productivity). Graphically, SRAS shifts right.
This two-panel figure shows how changes in key input costs (like natural resource prices) shift SRAS: higher input costs shift SRAS left, while lower input costs shift SRAS right. In each case, with AD unchanged, the new intersection demonstrates the core SRAS-shock pattern: real GDP and the price level move in opposite directions in the short run. Source
Short-run effects (with AD unchanged)
Real output (real GDP): increases
Price level: decreases
Employment: increases
Unemployment: falls
This matches the required syllabus relationship: output and employment move together, while the price level moves in the opposite direction. Intuitively, lower costs allow firms to expand production and compete prices downward.
How to show it on the AD–AS graph
Start at the initial intersection of AD and SRAS
Shift SRAS right
The new equilibrium is at a higher real GDP and a lower price level
Negative SRAS shocks (SRAS shifts left)
A negative SRAS shock raises firms’ costs or reduces productivity. Graphically, SRAS shifts left.
Short-run effects (with AD unchanged)
Real output (real GDP): decreases
Price level: increases
Employment: decreases
Unemployment: rises
This is the “opposite” case in the syllabus statement: output and employment fall together, while the price level rises. Cost increases squeeze profit margins, so firms cut production and raise prices.
How to show it on the AD–AS graph
Start at the initial intersection of AD and SRAS
Shift SRAS left
The new equilibrium is at a lower real GDP and a higher price level
Key patterns to memorise for SRAS shocks
SRAS shocks make real GDP and the price level move in opposite directions in the short run.
The labour market moves with output in the short run:
Output up → employment up → unemployment down
Output down → employment down → unemployment up
SRAS shocks can create difficult trade-offs because stabilising the price level and stabilising real GDP/unemployment may point in different directions.
FAQ
“Short-run” means some key input prices (especially wages set in contracts and some supplier prices) do not instantly adjust to economic conditions.
Because costs are slow to fully reset, firms respond first by changing output and prices rather than only prices.
An SRAS shift changes the economy’s ability to produce at each price level.
Right shift: costs fall/productivity rises → firms expand output and can charge lower prices.
Left shift: costs rise/productivity falls → firms cut output and raise prices to cover costs.
Higher productivity means more output per worker-hour, lowering unit labour cost.
If unit costs fall across many firms, SRAS shifts right even if demand is unchanged, raising real GDP while putting downward pressure on the price level.
Yes, if they change input costs. An appreciation can reduce the domestic-currency cost of imported commodities and components, shifting SRAS right.
A depreciation can increase imported input costs, shifting SRAS left, especially in import-dependent economies.
If workers and firms expect higher inflation, wage demands and price-setting tend to rise pre-emptively.
That increases production costs broadly, shifting SRAS left; lower expected inflation can ease wage/price pressures and shift SRAS right.
Practice Questions
(2 marks) Explain the short-run effect of a negative SRAS shock on (i) the price level and (ii) real GDP.
1 mark: Price level increases.
1 mark: Real GDP decreases.
(6 marks) An economy is initially in short-run equilibrium. Energy prices rise sharply. Using an AD–AS diagram, analyse the short-run effects on the price level, real output, and unemployment.
1 mark: Identifies the event as a negative SRAS shock / higher production costs.
1 mark: Correctly shows SRAS shifting left on an AD–AS diagram (AD unchanged).
1 mark: Price level rises in the new short-run equilibrium.
1 mark: Real output falls in the new short-run equilibrium.
1 mark: Employment falls and/or unemployment rises.
1 mark: Coherent linkage from higher costs → reduced supply at each price level → new equilibrium outcomes.
