What is aggregate supply in economics?

Aggregate supply is split into short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS). SRAS slopes upward because firms can increase output by paying higher wages as prices rise, whereas LRAS is vertical, reflecting the economy's productive capacity determined by factors of production rather than the price level.

The LRAS curve sits at the level of potential output, sometimes called the full employment level of output. In the UK, government investment in infrastructure and skills training — such as the apprenticeship levy — aims to shift LRAS rightward, increasing the economy's long-run productive capacity.

SRAS shifts when production costs change, such as a rise in oil prices or an increase in the national minimum wage. LRAS shifts when the quantity or quality of factors of production changes, including improvements in technology or net inward migration expanding the labour force.

1. →(4 marks) Explain two factors that could cause the short-run aggregate supply curve to shift to the left.
2. →(8 marks) Explain why an improvement in labour productivity would shift the long-run aggregate supply curve to the right.
3. →(12 marks) Analyse the likely impact of a significant rise in energy costs on short-run aggregate supply and the macroeconomic equilibrium.
4. →(20 marks) Evaluate the view that supply-side policies are the most effective way to increase long-run aggregate supply in the UK economy.
5. →(25 marks) Assess the extent to which shifts in aggregate supply, rather than aggregate demand, are responsible for economic growth in the UK.

• →Always define aggregate supply and clearly distinguish whether you are discussing SRAS or LRAS before developing any analysis, as examiners penalise conflation of the two curves.
• →Avoid stating that the LRAS curve shifts due to price level changes — LRAS is determined solely by productive capacity, not by changes in inflation or demand.
• →Show the effect of any AS shift using a correctly labelled AD/AS diagram, including the equilibrium price level and real output on the axes.
• →Include real UK examples, such as rising energy prices following the 2022 cost-of-living crisis, to contextualise SRAS shifts and access higher Level marks.
• →Define the difference between a movement along SRAS and a shift of SRAS in evaluation questions, as conflating these is one of the most penalised errors at A-Level.

Aggregate Supply (AS): The total level of real output that firms in an economy are willing and able to produce at each given price level over a given time period.

Short-Run Aggregate Supply (SRAS): The total output firms produce in the short run, when at least one factor of production is fixed, shown as an upward-sloping curve.

Long-Run Aggregate Supply (LRAS): The level of output an economy can produce when all factors of production are fully and efficiently employed, represented as a vertical curve at potential output.

Productive Capacity: The maximum level of output an economy can sustain using its available factors of production at full efficiency without generating inflationary pressure.

Supply-Side Policies: Government policies designed to increase productive capacity and shift LRAS to the right, such as investment in education, deregulation, or infrastructure spending.

Cost-Push Inflation: A rise in the general price level caused by an increase in production costs, such as higher energy or wage costs, which shifts the SRAS curve to the left.