Aggregate supply (AS) is the total output firms produce at each price level.
What shifts short-run AS (SRAS)
Wages
Higher wages raise every firm's costs: SRAS shifts left.
Raw materials and energy
More expensive oil or gas raises costs: SRAS left.
Business taxes and subsidies
A tax on firms shifts SRAS left; a subsidy shifts it right.
Supply shocks
A drought or a war cuts supply suddenly.
The points to remember
- SRAS slopes up: in the short run some costs, such as wages, are fixed, so higher prices mean more profit on extra output.
- A change in costs shifts SRAS.
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In the long run, all costs can change. Economists disagree about what AS looks like then.
Two views of long-run supply
Monetarist / new classical
LRAS is vertical at potential output: prices do not change what the economy can produce.
Keynesian
AS is flat with spare capacity, then rises, then is vertical at full employment.
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Potential output grows when the economy gets more, or better, factors of production.
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What shifts LRAS
More or better capital
Investment in machines, power, roads.
More or better labour
Education, training, more women in work, migration.
Technology and institutions
New methods, stronger property rights, less red tape.
Quick reminder
- Axes: Average price level up the side, Real GDP along the bottom
- Curves: AD, LRAS1 and LRAS2
- Marks: PL1, PL2, Y1 and Y2
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
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Paper 2 asked this in May 2025, for 4 marks.
Using an AD/AS diagram, explain the likely effect on potential output of further government investment in hydropower projects.
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How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |