Chapter 24: Problem 27

Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.

Short Answer

Expert verified

Some factors that could cause the SRAS curve to shift include changes in input prices, productivity, government regulations, labor force, and business taxes. If input prices or business taxes increase, or productivity, labor force, or government regulations decrease, the SRAS curve shifts to the left due to increased cost of production. Conversely, if input prices or business taxes decrease, or productivity, labor force, or government regulations increase, the SRAS curve shifts to the right as the cost of production decreases.

Step by step solution

Factor 1: Changes in Input Prices

A significant factor that could cause the SRAS curve to shift is changes in input prices. If the prices of the inputs (e.g., raw materials, labor, and energy) used in production increase, the cost of producing goods and services will also increase. This will cause firms to reduce their supply, resulting in a shift of the SRAS curve to the left. Conversely, if input prices decrease, the cost of production will decrease, and firms will increase their supply, causing the SRAS curve to shift to the right.

Factor 2: Changes in Productivity

Another factor that could cause the SRAS curve to shift is changes in productivity. Higher productivity allows firms to produce more output with the same amount of inputs, leading to a lower cost of production. As a result, firms can supply more goods and services at each price level, causing the SRAS curve to shift to the right. On the other hand, a decrease in productivity will increase the cost of production, causing the SRAS curve to shift to the left.

Factor 3: Changes in Government Regulations

Government regulations can also cause the SRAS curve to shift. If the government imposes new regulations that increase the cost of production for firms (e.g., stricter environmental regulations), this will cause the SRAS curve to shift to the left. Conversely, if the government reduces regulations, thereby decreasing the cost of production for firms, the SRAS curve will shift to the right.

Factor 4: Changes in Labor Force

Changes in the size and quality of the labor force can also cause the SRAS curve to shift. If the labor force expands due to an increase in population or immigration, more people will be available to work, and firms can increase their production, resulting in a rightward shift of the SRAS curve. On the other hand, a decrease in the labor force, due to factors such as an aging population or a decrease in immigration, will cause the SRAS curve to shift to the left.

Factor 5: Changes in Business Taxes

Changes in business taxes can also impact the SRAS curve. If the government imposes higher business taxes, this will increase the cost of production for firms and, consequently, cause the SRAS curve to shift to the left. In contrast, if the government reduces business taxes, this will lower the cost of production for firms and cause the SRAS curve to shift to the right.