Causes of shift in SRAS Curve

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What Causes Shifts in SRAS Curve ?

causes of shifts in sras curve

The two main causes of shits in the SRAS curve or aggregate supply shocks are changes in input price and increase in productivity.

Change in Input Price

An increase in input price means increased cost of production. With output prices remaining unchanged, increased cost results in reduced profits. This will result in lower production and thus less output will be supplied at each price level. Consequently, the whole supply curve (SRAS curve) will shift leftward or upward from SRAS0 to SRAS1. Similarly, with a fall in input prices, the production cost decreases and with unchanged output prices, profits margins go up. The producers are therefore, induced to produce and sell more at each price level. This causes a downward or rightward shift in the SRAS curve from SRAS0 to SRAS2 as shown.

Increase in Productivity.

An increase in productivity of inputs, works in the same manner as decrease in input prices and caused downward or rightward shift in SRAS curve. For example, if labor productivity increases, it means each worker produces more output per unit of time, say per day. If wage rate remains unchanged, it means more output is produced for same wage payment. Thus, per unit cost of products will fall. With lower cost, each firm will like to capture a bigger share of market supply by charging lower per unit price. The competing firms will thus push down the price level. Thus, when the same output is sold at lower price level, this pushes the SRAS curve downwards or rightwards. The producers together are now producing more output at each level of price than before and thus there is an increase in aggregate supply. A decrease in productivity will have the opposite effect and shift the SRAS curve upward or leftward.

A change in input price or productivity will shift the SRAS curve .... An increase in input price or decrease in productivity shift the SRAS curve to the left; an increase in productivity or decrease in input prices shift it to the right.


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