Edexcel A-Level Economics A (9EC0) · Theme 2
Specification points
- Short-run and long-run aggregate supply (SRAS, LRAS).
- The factors that shift SRAS and LRAS.
- Keynesian and classical LRAS.
Aggregate supply
Aggregate supply (AS) is the total output firms are willing to produce at each price level.
- SRAS slopes upwards: at higher price levels, and with input costs fixed in the short run, firms produce more.
- LRAS shows the economy's productive capacity, independent of the price level.
Shifting AS
- SRAS shifts with input costs — wages, raw materials, energy, exchange rates and indirect taxes.
- LRAS shifts with the quantity and quality of factors — the size and skill of the workforce, investment in capital, technology, and productivity.
SRAS shifts with costs; LRAS shifts with productive capacity (resources, skills, technology).
Key definitions
| Term | Definition |
|---|---|
| SRAS | Total output at each price level with input prices fixed in the short run. |
| LRAS | The economy's full productive capacity, independent of the price level. |
| Productivity | Output per unit of input; a key driver of LRAS. |
Classical versus Keynesian LRAS
- The classical view: LRAS is vertical at full capacity — in the long run the economy self-corrects to full employment, so only supply-side factors raise output.
- The Keynesian view: LRAS has a horizontal section (spare capacity), an upward-sloping section, then a vertical section — so demand can raise real output when there is spare capacity, without inflation.
Worked example
A large rise in world oil prices raises firms' costs across the economy, shifting SRAS left: the price level rises and real output falls (cost-push inflation). Separately, sustained investment in education and technology shifts LRAS right, raising capacity and allowing non-inflationary growth over time.
Common exam mistakes
- Confusing SRAS shifts (costs) with LRAS shifts (capacity).
- Mixing up the classical (vertical) and Keynesian (three-section) LRAS.
- Treating a cost change as a demand-side effect.
Exam technique
State whether the event affects SRAS or LRAS, shift the correct curve, and read off the effect on the price level and real output. Use the LRAS debate for evaluation.
Quick revision
- SRAS: costs; LRAS: capacity (resources, skills, technology).
- Classical LRAS vertical; Keynesian LRAS three sections.