AQA A-Level Economics (7136)

## Learning Outcomes

- Define **short-run aggregate supply (SRAS)** accurately
- Explain why the SRAS curve slopes upward in the short run
- Identify the main determinants that shift SRAS left or right
- Distinguish clearly between a movement along SRAS and a shift of SRAS
- Apply SRAS analysis to inflation, output and unemployment
- Use chains of reasoning and examples in AQA-style exam answers
- Evaluate why the size of an SRAS shift depends on industry structure, time period and the nature of the shock

## AQA A-Level Economics (7136) Syllabus

For the AQA A-Level Economics (7136), you are expected to understand determinants of short-run aggregate supply, with a focus on the following syllabus points:

- Know that **SRAS** is the relationship between the general price level and real national output supplied in the short run
- Explain why the short run assumes some production costs, especially money wages, are fixed
- Identify factors that shift SRAS, including wage costs, raw material costs, indirect taxes, subsidies, productivity and exchange rate changes
- Explain the difference between a movement along the SRAS curve and a shift in the SRAS curve
- Understand how a leftward shift in SRAS can cause **cost-push inflation** and lower real output
- Distinguish between determinants of **SRAS** and determinants of **LRAS**
- Apply SRAS analysis to real UK-style examples such as energy price rises, supply-chain disruption and currency depreciation

## 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. What is short-run aggregate supply?
2. Why does the SRAS curve slope upward from left to right?
3. Name three factors that can shift SRAS to the left.
4. How does a rise in productivity affect SRAS?
5. Why might a fall in the exchange rate reduce SRAS?

## Introduction

Short-run aggregate supply is one of the most tested parts of macroeconomic analysis because it links business costs to inflation, output and unemployment. In AQA exam questions, students are often asked to explain why SRAS shifts left or right, then use this to analyse effects on the economy.

A strong answer depends on one central idea: in the short run, firms supply output based on profitability. If **unit costs** rise, firms are less willing to produce at each price level, so SRAS shifts left. If unit costs fall or efficiency improves, firms are willing to supply more, so SRAS shifts right.

> **Key Term: short-run aggregate supply (SRAS)**
> The total real output firms are willing to supply at different price levels in the short run.

### What SRAS shows and why it slopes upward

The SRAS curve shows a positive relationship between the **price level** and the quantity of **real national output** firms are willing to supply. This is why the curve slopes upward from left to right.

Why does this happen? In the short run, some factor costs are assumed to be fixed, especially money wage rates. If the general price level rises while key costs stay unchanged, selling output becomes more profitable. Firms then have an incentive to increase production.

There is also a microeconomic reason. Firms aim to maximise profit, but as they try to produce more in the short run, extra output often becomes more costly to produce. If marginal costs rise, firms need higher prices to make higher output worthwhile.

> **Key Term: price level**
> The average level of prices in the economy.
>
> **Key Term: movement along SRAS**
> A change in the quantity of real output supplied caused by a change in the general price level, not by a shift in production conditions.

A movement along SRAS happens when the **price level changes**. If prices rise, firms move up the existing SRAS curve and supply more output. If prices fall, firms move down the curve and supply less.

A shift of SRAS is different. It happens when non-price factors change firms' costs or efficiency.

> **Test Tip:** A very common error is to say that a higher price level shifts SRAS. It does not. A higher price level causes a movement along the SRAS curve.

### The main determinants of shifts in SRAS

The easiest rule to remember is this: anything that raises firms' **costs of production** tends to shift SRAS left, while anything that lowers costs or improves efficiency tends to shift SRAS right.

> **Key Term: unit costs**
> The cost of producing one unit of output.

#### Wage costs

If money wage rates rise and productivity does not rise by the same amount, firms face higher labour costs per unit. This reduces profitability and shifts SRAS left.

For example, if workers are paid more per hour but output per worker stays the same, unit labour costs rise. At each price level, firms are less willing to supply.

However, a rise in wages does not always reduce SRAS. If wages rise because workers are more productive, unit costs may stay unchanged or even fall.

Chain analysis:

- higher money wages
- higher unit labour costs
- lower profitability at each price level
- less output supplied
- SRAS shifts left

#### Raw materials, energy and transport costs

A rise in the cost of oil, gas, metals, food inputs or transport raises production costs across many industries. Energy costs are especially significant because they affect manufacturing, logistics, retail and services.

For the UK, the surge in gas and energy prices in **2021-2022**, especially after Russia's invasion of Ukraine in **February 2022**, is a strong example of a negative supply-side shock. Higher energy costs raised firms' costs and contributed to a leftward shift in SRAS.

Chain analysis:

- higher oil or gas prices
- firms face higher production and distribution costs
- output becomes less profitable
- SRAS shifts left
- equilibrium price level rises and real output falls
  > **Key Term: supply-side shock**
  > An unexpected event that changes production costs or the ability of firms to supply output.

#### Indirect taxes and subsidies

Higher **indirect taxes** on production raise costs for firms. This may include taxes that increase the cost of selling or producing goods and services. If firms face higher tax costs, they are less willing to supply at each price level, so SRAS shifts left.

By contrast, increased **subsidies** lower firms' costs and can shift SRAS right.

> **Key Term: indirect taxes**
> Taxes on spending or production that raise firms' costs, such as VAT or excise duties.

AQA questions often reward precise chains of logic here:

- higher indirect tax
- higher business costs
- lower profitability
- lower output supplied at each price level
- leftward shift in SRAS

#### Productivity

Higher productivity means more output is produced per worker or per unit of input. This reduces unit costs and increases profitable supply, shifting SRAS right.

This is a very important distinction. Productivity can affect both SRAS and LRAS. In the short run, it matters because firms can produce more cheaply now. In the long run, sustained productivity growth can also increase productive potential.

Example:

- improved training
- better organisation
- more efficient machinery use
- higher output per worker
- lower unit costs
- SRAS shifts right
  > **Test Tip:** If productivity rises, do not write only about LRAS. For this topic, explain the short-run effect on unit costs and SRAS as well.

### Exchange rates, import dependence and adverse shocks

A change in the exchange rate affects SRAS when firms rely on imported raw materials, components or energy.

If **sterling depreciates**, imports become more expensive in pound terms. UK firms that buy imported inputs then face higher costs. This shifts SRAS left.

If sterling appreciates, imported inputs become cheaper, which may shift SRAS right.

> **Key Term: exchange rate depreciation**
> A fall in the value of a currency, making imports more expensive and exports cheaper.

This does not affect every firm equally. A domestic hairdresser may be affected less than a car manufacturer using imported components. That is where evaluation becomes stronger.

Good application examples for the UK include:

- **2022-2023** periods of sterling weakness increasing imported inflation
- semiconductor shortages disrupting car production in **2021**
- HGV driver shortages in the UK in **2021**, raising distribution costs
- post-Brexit trade frictions from **2021 onwards**, increasing some firms' customs and transport costs

These are all examples of negative short-run supply influences because they raised costs or reduced efficiency.

### Using SRAS analysis in exam answers

In diagram terms, SRAS should be drawn with:

- vertical axis: **price level**
- horizontal axis: **real national output**

A leftward shift from SRAS1 to SRAS2 shows that at every price level, less output is supplied. If aggregate demand stays unchanged, equilibrium moves to:

- a higher price level
- a lower level of real output

This is the classic result of **cost-push inflation**.

> **Key Term: cost-push inflation**
> Inflation caused by rising costs of production, often shown by a leftward shift in SRAS.

This may also cause higher unemployment because firms produce less output and may need fewer workers. If inflation rises while output stagnates or falls, the economy may face **stagflation**.

> **Key Term: stagflation**
> A situation where inflation occurs at the same time as stagnant or falling output.

#### How to structure an evaluative answer

AQA evaluation should use an **on the one hand / on the other hand / it depends on** structure.

On the one hand, a rise in wage costs, energy costs or taxes can clearly shift SRAS left by increasing unit costs.

On the other hand, the effect may be limited if:

- firms can absorb costs through lower profit margins
- the cost rise is temporary
- demand is weak, so firms cannot pass costs on fully
- the sector is not very energy-intensive or import-dependent
- productivity improvements offset cost increases

It depends on:

- how large the cost shock is
- whether the shock is temporary or persistent
- how many firms are affected across the economy
- whether the economy has spare capacity
- whether government support reduces costs
- whether the change affects SRAS only, or also LRAS over time

A strong evaluative paragraph uses both financial and contextual evidence. For example, rising gas prices matter more for steel, chemicals and transport than for digital services. Exchange rate depreciation matters more for firms using imported inputs. This is more analytical than a generic statement that “the impact depends on the economy”.

#### Common student errors

Students often make the following mistakes:

- confusing a movement along SRAS with a shift in SRAS
- using demand-side factors such as consumption or investment to explain SRAS shifts
- writing that all supply-side changes affect only LRAS
- forgetting to explain the effect on both **price level** and **real output**
- saying a rise in wages always shifts SRAS left, without considering productivity
- mentioning exchange rates without explaining imported input costs
  > **Test Tip:** In a 15-mark answer, do not just list causes. For each cause, use a chain: higher costs or lower efficiency -> less profitable to produce -> less supplied at each price level -> SRAS shifts left.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- SRAS is the total real output firms are willing to supply at different price levels in the short run
- The SRAS curve slopes upward because higher prices can make extra output more profitable when some costs are fixed
- A movement along SRAS is caused by a change in the general price level
- A shift in SRAS is caused by non-price factors such as costs of production or productivity
- Higher wage costs tend to shift SRAS left if productivity does not rise too
- Higher raw material, energy and transport costs tend to shift SRAS left
- Higher indirect taxes tend to shift SRAS left, while higher subsidies tend to shift SRAS right
- Higher productivity lowers unit costs and tends to shift SRAS right
- Exchange rate depreciation can shift SRAS left when firms rely on imported inputs
- A leftward shift in SRAS causes higher prices and lower real output, creating cost-push inflation
- The size of an SRAS shift depends on industry dependence on energy, imports and the persistence of the shock
- Productivity changes can affect both SRAS in the short run and LRAS in the long run

## Key Terms and Concepts

- short-run aggregate supply (SRAS)
- price level
- movement along SRAS
- unit costs
- supply-side shock
- indirect taxes
- exchange rate depreciation
- cost-push inflation
- stagflation


How the Macroeconomy Works - Determinants of short-run aggregate supply