Why does short-run aggregate supply slope upward, and what shifts it?
Topic 3.3 Short-Run Aggregate Supply: explain why the short-run aggregate supply curve slopes upward using sticky wages and prices, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.3, covering the upward slope of short-run aggregate supply, sticky wages and prices and misperceptions, supply shocks, and the determinants that shift SRAS, with a worked graphing question.
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What this topic is asking
Topic 3.3 introduces the supply side of the AD-AS model in the short run. The College Board wants you to explain why the short-run aggregate supply (SRAS) curve slopes upward, and to identify what shifts it. Supply shocks tested here, especially oil prices, are a recurring free-response scenario.
Why SRAS slopes upward
The upward slope comes from sticky input prices. In the short run, wages are set by contracts and some other input prices are slow to adjust. When the aggregate price level rises, the prices firms receive for their output go up, but their wage and other fixed costs do not, at least not yet. Profit margins widen, so firms expand production. The reverse happens when the price level falls. The result is a positive relationship between the price level and real output, hence the upward slope.
What shifts SRAS
A change in the price level is a movement along SRAS. SRAS shifts when something changes firms' per-unit production costs or the economy's productive capacity.
A supply shock is a sudden change in input costs that shifts SRAS. A negative supply shock (left shift) raises the price level while lowering output, the combination called stagflation, which is hard for policymakers because fixing one problem worsens the other.
Try this
Q1. Explain in one sentence why SRAS slopes upward. [2 points]
- Cue. Because some input prices (especially wages) are sticky in the short run, a higher price level widens profit margins and firms produce more.
Q2. Give one event that would shift SRAS to the right. [1 point]
- Cue. Any one of: a fall in input prices, a producer subsidy, improved technology, or an increase in the labor force.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2019 (style)1 marksMultiple choice. Which of the following would shift the short-run aggregate supply curve to the left? (A) A fall in the price of oil. (B) A technological improvement. (C) An increase in nominal wages. (D) A subsidy to producers. (E) An increase in the labor force.Show worked answer →
The answer is (C). The short-run aggregate supply curve shifts when the cost of production changes. Higher nominal wages raise per-unit production costs, so firms supply less output at every price level, shifting SRAS left.
(A), (B), (D), and (E) all lower production costs or raise productive capacity, shifting SRAS right. Only (C) raises costs, shifting it left.
AP 2020 (style)4 marksFree response. (a) Draw a correctly labelled graph of aggregate demand and short-run aggregate supply at equilibrium. (b) Explain why the short-run aggregate supply curve slopes upward. (c) A sharp rise in oil prices occurs. Show the effect on short-run aggregate supply. (d) State what happens to the price level and real output in the short run.Show worked answer →
A 4-point graphing FRQ.
(a) Graph (1 point): price level (PL) on the vertical axis, real GDP on the horizontal axis, downward-sloping AD and upward-sloping SRAS crossing at and .
(b) Upward slope (1 point): in the short run some input prices, especially nominal wages, are sticky; when the price level rises, output prices rise faster than these fixed costs, so profit margins widen and firms produce more.
(c) Shift (1 point): a rise in oil prices raises production costs, shifting SRAS left from to .
(d) Result (1 point): the new equilibrium has a higher price level and lower real output, that is, stagflation.
Markers reward correct labels, the leftward SRAS shift, and the higher-price-lower-output result.
Related dot points
- Topic 3.1 Aggregate Demand: define aggregate demand, explain the wealth, interest-rate, and exchange-rate effects that make it downward sloping, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.1, covering the definition of aggregate demand, the three reasons it slopes downward (the wealth, interest-rate, and exchange-rate effects), the components C plus I plus G plus net exports, and the determinants that shift the curve, with a worked graphing question.
- Topic 3.4 Long-Run Aggregate Supply: explain why the long-run aggregate supply curve is vertical at full-employment (potential) output, and identify what shifts it.
A focused answer to AP Macroeconomics Topic 3.4, covering the vertical long-run aggregate supply curve, full-employment and potential output, the natural rate of unemployment, the link to the production possibilities curve, and the determinants of long-run growth, with a worked question.
- Topic 3.5 Equilibrium in the AD-AS Model: locate short-run and long-run macroeconomic equilibrium, and identify recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.5, covering short-run and long-run macroeconomic equilibrium, the relationship between short-run equilibrium and full-employment output, and how to identify recessionary and inflationary output gaps on the AD-AS graph, with a worked question.
- Topic 3.6 Changes in the AD-AS Model in the Short Run: trace how shifts in aggregate demand or short-run aggregate supply change the price level, real output, and unemployment in the short run.
A focused answer to AP Macroeconomics Topic 3.6, covering demand shocks and supply shocks in the short run, their effects on the price level, real output, and unemployment, and how to read the resulting output gaps, with a worked graphing question.
- Topic 3.7 Long-Run Self-Adjustment: explain how flexible wages and prices return the economy to full-employment output after a demand or supply shock, with no policy intervention.
A focused answer to AP Macroeconomics Topic 3.7, covering how the economy self-corrects from recessionary and inflationary gaps through flexible wages shifting short-run aggregate supply, the classical view, and the trade-off with active policy, with a worked graphing question.
Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)