Aggregate Supply in the Short Run

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  • 0:01 Definition and Short…
  • 4:10 Short Run Determinants
  • 6:03 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn about aggregate supply in the short run (SRAS) and what that really means. Find out how the overall price of goods affects quantity supplied in the short run and other key determinants that can increase and decrease aggregate supply in this time period.

Definition and Short Run Explained

Imagine you are a small business owner that builds and sells your own unique sunglasses in the local mall. You have a small amount of money in your business account and have four other employees that work for you. To your surprise, your sunglasses sell much faster than predicted and at a higher price than you thought they might. You realize that in order to keep up with the current demand, your only option is to ask the two employees that help make sunglasses to work more hours. This will result in overtime, but you still think it will be profitable.

Your unique constraints and limitations to supply more sunglasses in the short run are just like the constraints of short-run aggregate supply for the entire economy. In the long run, you may be able to hire more skilled workers, build a small factory, invest in more training and education of your workers, or buy some new machinery that will help produce more glasses. All of these would help you increase your supply and output of sunglasses over time. In the short run, you are limited with your current machines and small bank account.

Aggregate supply in the short run (SRAS) is best defined as the total production of goods and services available in an economy at different price levels while some resources to produce are fixed. What do we mean by 'fixed?' In the short run, companies increase aggregate supply in an economy by increasing their use of current inputs, such as labor hours. Companies, like our sunglasses shop, work current employees and available machinery more to produce additional product.

But what the sunglasses shop owner can't do overnight is dramatically increase the bank account, build a factory or install and train everyone on the latest technological machines to produce sunglasses more efficiently. The amount of capital in the bank, the space and machines where sunglasses are made and possibly the vendor arrangements that provide materials to build the glasses are all things that require time to change. These can all be changed over the long run, but during the short run, these aren't options to meet current demand. These resources are fixed.

The short run may be two months or an entire year. It doesn't have a specific unit of time associated with it; rather, it is tied to how long some of your resources are fixed. How quickly can you build that new factory? How quickly can you get a loan and get a new machine installed? How long would it take you to hire three new employees and properly train them? Your answer to these questions is what determines the short run and the long run. In the long run, you can change any of your available resources to increase production. In the short run, some of these things are rigid or inflexible; they can't be changed quickly.

In economics, we look at both long-run and short-run aggregate supply curves. The short run curve is upward-sloping and shows a relationship between quantity supplied (output) and price level. As prices increase, the quantity supplied increases. Suppliers and companies are motivated by profit and sales. So, when they see products are selling at higher prices, they will naturally try to produce more.

In the short run, an increase in the price of goods encourages firms to work employees longer, pay slightly higher wages and produce more along the supply curve within their given constraints. There are other variables or determinants discussed below that can cause the entire curve to shift to the right (an increase in aggregate supply) or to the left (a decrease in aggregate supply). Should any of these determinants change, the short-run aggregate supply curve shifts to a new position, which means firms are now willing to produce a different quantity of goods at the same price levels as before.

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