AP Macroeconomics

## Learning Outcomes

- Understand why the **short-run aggregate supply (SRAS)** curve slopes upward
- Explain how the **price level** is linked to the **quantity of real GDP supplied**
- Distinguish clearly between a movement along SRAS and a shift of SRAS
- Identify the main factors that shift SRAS left or right
- Contrast SRAS with **long-run aggregate supply (LRAS)**
- Apply SRAS reasoning to AD-AS graphs and AP-style questions

## AP Macroeconomics Syllabus

For the AP Macroeconomics, you are expected to understand how short-run aggregate supply links the price level to real output, with a focus on the following syllabus points:

- Know that SRAS shows the relationship between the **price level** and the **quantity of real GDP supplied**
- Explain why the SRAS curve is **upward sloping** in the short run
- Understand that a change in the **price level** causes a **movement along** SRAS, not a shift
- Identify that **sticky nominal wages** and other sticky input costs help explain the SRAS slope
- Explain how higher output prices, with input costs slow to adjust, raise firm profitability and output
- Identify the main SRAS shifters, including **input prices**, **productivity**, **business taxes**, and **government regulation**
- Distinguish SRAS from LRAS: SRAS is upward sloping, while LRAS is vertical at **full-employment output**
- Use the AD-AS model to explain how changes in AD can move the economy to a different point on SRAS

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Why does a higher price level usually lead to a greater quantity of real GDP supplied in the short run?
2. What is the difference between a movement along SRAS and a shift of SRAS?
3. How do sticky nominal wages help explain the upward slope of SRAS?
4. Name three events that would shift SRAS to the left.
5. How is SRAS different from LRAS on a graph?

## Introduction

In AP Macroeconomics, **short-run aggregate supply** is one of the most tested parts of the AD-AS model because it connects two ideas students often keep separate: the **overall price level** and the **amount of real output firms produce**. You need to know not just that SRAS slopes upward, but why that happens and how to use that logic on graphs.

This topic matters because many exam questions hide SRAS inside broader policy or business-cycle scenarios. If aggregate demand changes, you must decide whether the economy moves **along** SRAS or whether SRAS itself **shifts**. That distinction is a common source of lost marks.

> **Key Term: short-run aggregate supply (SRAS)**
> The relationship between the **price level** and the **quantity of real GDP supplied** by firms in the short run.

### What SRAS shows on a graph

On an SRAS graph, the vertical axis is the **price level** and the horizontal axis is **real GDP** or **real output**. The curve slopes upward from left to right. That slope means one simple rule:

- **Higher price level → higher quantity of real GDP supplied**
- **Lower price level → lower quantity of real GDP supplied**

This does not mean firms like inflation for its own sake. It means that in the short run, output prices can change faster than some production costs. When that happens, producing more becomes more profitable.

> **Key Term: price level**
> A measure of the average prices of final goods and services in the economy.
>
> **Key Term: quantity of real GDP supplied**
> The amount of inflation-adjusted output firms are willing to produce at a given price level.

A useful comparison is with an ordinary supply curve in microeconomics. A higher market price leads firms to supply more of a good. In macroeconomics, SRAS applies that basic logic to the whole economy. But here the key output measure is **real GDP**, not the quantity of one product.

Students often make their first mistake here: they say “aggregate supply increases” when the price level rises. That is too vague. If the curve itself has not moved, the correct wording is **the quantity of real GDP supplied increases**.

> **Test Tip:** On AP multiple-choice questions, read the verb closely. If only the **price level** changes, the correct answer is usually about a **movement along SRAS** and a change in the **quantity of real GDP supplied**, not a shift of the curve.

### Why SRAS slopes upward in the short run

The main AP explanation is **sticky input costs**, especially **sticky nominal wages**.

> **Key Term: sticky nominal wages**
> Wages stated in money terms that adjust slowly in the short run, even when the price level changes.

Suppose the price level rises from PL1 to PL2. Firms can now sell their products for higher prices. But workers’ nominal wages may still be unchanged because of contracts, slow renegotiation, or delayed adjustment. That means firms’ labor costs have not yet risen as fast as output prices.

This changes profitability in two steps:

1. **Output prices rise**
2. **Some input costs stay fixed for a while**
3. **Profit per unit rises**
4. **Firms respond by producing more**

That is the core reason SRAS slopes upward.

You can also state the same idea using **real wages**:

- **Real wage = nominal wage / price level**

If nominal wages stay the same while the price level rises, the real wage falls. From the firm's point of view, labor becomes cheaper in real terms. Hiring workers and expanding production becomes more attractive.

Worked example:

- Nominal wage = $20 per hour
- Initial price level index = 100
- New price level index = 110

Real wage initially:

- 20 / 100 = 0.20

Real wage after the price level rises:

- 20 / 110 = 0.1818

The real wage has fallen. The worker is still paid $20 in money terms, but that wage now represents a smaller amount relative to output prices. Firms' costs have not risen as fast as their revenue, so firms increase output.

This is why a rise in the price level causes a move upward along SRAS to a larger quantity of real GDP supplied.

The reverse also matters. If the price level falls while nominal wages stay sticky, firms receive lower prices for output but still face similar wage costs. Profitability falls, so firms cut production. That is why lower price levels are associated with lower quantities of real GDP supplied.

Some students ask, “Why don’t wages just change immediately?” In reality, many contracts, habits, and adjustment costs slow that process. Firms may also face **menu costs**, meaning it takes time and effort to change prices, wages, and business plans. AP Macroeconomics does not need a long theory here. The exam just wants you to understand that some costs are slow to adjust, and that short-run stickiness makes output respond to price level changes.

### Movement along SRAS versus shifts of SRAS

This is the highest-value distinction in this topic.

A **change in the price level alone** causes a **movement along** the SRAS curve.

A **change in production conditions** causes a **shift** of the SRAS curve.

So if the price level rises because aggregate demand increased, firms move to a new point on the existing SRAS curve. SRAS itself has not shifted unless something changed in costs, productivity, or expectations.

> **Key Term: movement along the SRAS curve**
> A change in the quantity of real GDP supplied caused only by a change in the price level.
>
> **Key Term: shift of SRAS**
> A leftward or rightward change of the whole short-run aggregate supply curve caused by a non-price-level factor such as input costs or productivity.

Here is the clean rule:

- **Price level changes** → movement along SRAS
- **Input prices, productivity, taxes, regulation, expectations** → SRAS shifts

Examples of movement along SRAS:

- Aggregate demand rises, raising the equilibrium price level
- Aggregate demand falls, lowering the equilibrium price level

In both cases, firms respond to the new price level by changing output supplied. The curve stays in place.

Examples of SRAS shifts:

- Oil prices rise
- Worker productivity improves
- Business taxes increase
- Regulation raises compliance costs

A good way to test yourself is to ask: “Is the vertical-axis variable itself changing, or is some outside condition changing?” If the variable on the axis changes, move along the curve. If another factor changes, shift the curve.

> **Test Tip:** Many AP questions disguise SRAS shifters. “A larger labor force” means more resources. “An oil shock” means higher input costs. “A new production method” means higher productivity. Translate the story into cost or efficiency effects.

### What shifts SRAS left or right

SRAS shifts when firms can produce more or less at every price level.

#### SRAS shifts right

SRAS shifts right when production becomes cheaper or more efficient.

Main causes:

- Lower input prices
- Higher productivity
- Lower business taxes
- Less costly regulation
- Favorable supply shocks

Why? Because firms can now produce more output at each price level.

Examples:

- A fall in oil prices lowers transportation and production costs
- Better worker training raises output per worker
- New technology lets firms produce more with the same resources

If SRAS shifts right in the AD-AS model, the usual short-run result is:

- **Real output rises**
- **Price level falls**

That is why positive supply-side changes can be good news on both growth and inflation.

#### SRAS shifts left

SRAS shifts left when production becomes more expensive or less efficient.

Main causes:

- Higher nominal wages
- Higher oil or raw material prices
- Lower productivity
- Higher business taxes
- More costly regulation
- Negative supply shocks such as natural disasters

Why? Because firms now produce less at each price level.

Examples:

- Oil prices jump sharply
- A hurricane destroys factories
- New regulation raises compliance costs
- Productivity falls because of supply disruption

If SRAS shifts left in the AD-AS model, the usual short-run result is:

- **Real output falls**
- **Price level rises**

This combination is especially important because it creates **stagflation**.

> **Key Term: stagflation**
> A situation in which the price level rises while real GDP falls, usually caused by a leftward shift of SRAS.

A classic example is an oil price shock. Higher oil prices raise costs across many industries, from transport to manufacturing. Firms cut output, so real GDP falls. At the same time, higher costs push prices up. That is exactly the pattern AP students must recognize.

### SRAS in relation to AD and LRAS

AP questions rarely test SRAS in total isolation. Usually, SRAS appears inside the full AD-AS model.

In the short run, the intersection of **AD** and **SRAS** determines:

- the equilibrium price level
- the equilibrium real GDP

If AD shifts while SRAS stays fixed, the economy moves to a different point on SRAS.

Example:

- Consumer confidence rises
- AD shifts right
- Equilibrium price level rises
- Firms move up along SRAS
- Quantity of real GDP supplied rises

Notice the logic chain:
policy or spending change → AD shifts → price level changes → movement along SRAS

Students often skip the middle step. But on FRQs, that middle step earns points.

Now compare SRAS with LRAS.

> **Key Term: long-run aggregate supply (LRAS)**
> The level of real GDP the economy can produce at full employment, shown by a vertical curve because output does not depend on the price level in the long run.

SRAS versus LRAS:

- **SRAS** is upward sloping
- **LRAS** is vertical

Why the difference?

In the short run, some wages and input prices are sticky, so firms respond to price level changes by changing output.

In the long run, wages and other input costs adjust. If output prices rise, input prices eventually rise too. The temporary profit gain disappears. So price level changes no longer affect real output. Only resources and technology determine long-run output.

This contrast matters on almost every AD-AS FRQ. If the economy is below full-employment output, long-run adjustment often involves falling input prices shifting SRAS right. If the economy is above full-employment output, long-run adjustment often involves rising input prices shifting SRAS left.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- SRAS shows the relationship between the price level and the quantity of real GDP supplied
- The SRAS curve is upward sloping in the short run
- A higher price level leads to a higher quantity of real GDP supplied in the short run
- Sticky nominal wages help explain why SRAS slopes upward
- If the price level rises while nominal wages are fixed, real wages fall
- Lower real wages make labor cheaper to firms in real terms and can encourage more output
- A change in the price level causes a movement along SRAS, not a shift
- Changes in input prices, productivity, taxes, regulation, or supply shocks shift SRAS
- SRAS shifts right when costs fall or productivity rises
- SRAS shifts left when costs rise or productivity falls
- A leftward SRAS shift can cause stagflation: higher prices and lower real GDP
- SRAS is upward sloping, while LRAS is vertical at full-employment output

## Key Terms and Concepts

- short-run aggregate supply (SRAS)
- price level
- quantity of real GDP supplied
- sticky nominal wages
- movement along the SRAS curve
- shift of SRAS
- stagflation
- long-run aggregate supply (LRAS)


Short-Run Aggregate Supply (SRAS) - SRAS links prices and output