Page 85 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Second, there is cost associated with reducing inputs. For examples, when downturn is
over and more workers are employed additional expenditure has to be incurred in training
them.
On account of these reasons though the firms may produce less but may not reduce inputs
already employed. They may have surplus labour and capital.

With surplus labour and capital with the firms and excess capacity in the economy as a
whole, as AS starts increasing, output may increase with little or no increase in price level.

Example: in Figure 4.12 between A and B aggregate supply is considerably higher but
the overall price level only slightly higher. This makes the SRAS curve fairly flat at the low
levels of output.
Why vertical when producing maximum?: As aggregate supply rises the firms and the economy
approach to their capacity. If in the economy aggregate demand is still rising, it may result in
less and less rise in output and more and more rise in input prices. It will force the firms to
increase their output prices. This happens between B and C in Figure. At C the economy is
producing the maximum it can. From C onwards thus the SAS curve becomes vertical, parallel
to the Y-axis.
Shift of the SRAS curve: Shift of the SAS curve means change in aggregate supply at a given P.

Example: in Figure 4.13, when the SRAS curve shifts to the left, the aggregate supply at
the given price is reduced from PA and PB. What leads to the shift?
Figure 4.13

When P changes, both the output prices and the input prices change. Such changes in input prices
which are on account of change in output prices cause only movement along the SAS curve. The
changes in costs which are not on account of changes in output prices cause shift of the SAS curve.
Besides, other changes like growth of resources, decrease in resources, government policies, etc.
can also cause the shift. Some of the factors which cause the shift are:
Change in costs not resulting from change in output prices: The costs which change in
response of change of output prices are built into the short run AS curve. The costs which
do not result from changes in output prices shift the SAS curve.

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