SRAS Shift Left (Negative Supply Shock)

What this diagram shows

A leftward shift of the Short-Run Aggregate Supply (SRAS) curve represents a negative supply shock, where firms face higher production costs or reduced productive capacity. This shift shows that at every price level, businesses are now willing and able to supply less output than before. The result is stagflation - a combination of higher prices and lower real GDP, creating both inflationary pressure and economic contraction simultaneously. This is particularly problematic for policymakers as it presents a trade-off between controlling inflation and supporting economic growth.

Key points

• SRAS shifts left due to increases in production costs (wages, raw materials, energy) or supply chain disruptions
• Movement from original equilibrium shows higher price level and lower real GDP - demonstrating stagflation
• Common causes include oil price shocks, natural disasters, trade wars, or significant wage increases
• Creates a policy dilemma: expansionary policy risks higher inflation, contractionary policy worsens recession
• In the long run, the economy may self-correct as wages and prices adjust, but this process can be slow and painful

Exam board notes

All major exam boards treat this diagram identically, emphasizing the importance of distinguishing between supply-side shocks (shifts) and demand-side changes (movements along curves). However, OCR tends to place slightly more emphasis on discussing the policy implications and trade-offs created by negative supply shocks.