What is the AS curve?

To understand what the AS curve is, it is important to first under what AS is. AS (Aggregate Supply) measures the total volume of goods and services that producers in an economy are willing and able to produce at a specific price level.

The Short-Run Aggregate Supply (SRAS) curve is shown below:

The SRAS curve is upward-sloping. This is because, if a producer wishes to extend output in the short run, this will likely lead to an increase in short-run costs. For example, a firm is likely to pay workers for working overtime. This increase in short-run costs for the producer will likely lead to the producer raising their prices in order to pay for these costs, resulting in a higher price level.

There are two main types of Long-Run Aggregate Supply Curve (LRAS) - Keynesian and Classical. These are analysed later on in this article. 

What is the distinction between a movement along and a shift of the AS curve?

A movement along the AS curve is caused by a change in the price level, whereas a shift of the AS curve comes about as a result of a change in one or multiple factors that affect aggregate supply.

With a Short-Run Aggregate Supply (SRAS) curve, a change in the price level will result in a movement along the SRAS curve. An increase in the price level leads to an extension of real output and a fall in the price level leads to a contraction of real output. An increase in SRAS will lead to an outward shift of the SRAS curve, and a fall in SRAS will lead to an inward shift of the SRAS curve. The factors that influence and lead to an increase or decrease in SRAS are analysed later on in this article.

With a Long-Run Aggregate Supply (LRAS) curve, a change in the price level will result in a movement along the LRAS curve. With a Classical LRAS curve, a change in the price level will lead to no change (so no extension or contraction) in real output. With a Keynesian LRAS curve, a change in the price level may lead to a change (an extension or contraction) in real output dependent on how many resources in the economy are employed. For example, between the perfectly elastic and inelastic part of the Keynesian LRAS curve, a rise in the price level will likely lead to an extension in real output, and a fall in the price level will likely result in a contraction in real output. Classical and Keynesian LRAS curves are discussed later on in this article. An increase in LRAS will lead to an outward shift of the LRAS curve, and a fall in LRAS will lead to an inward shift of the LRAS curve. The factors that influence and lead to an increase or decrease in LRAS are analysed later on in this article.

What is the relationship between Short-Run AS (SRAS) and Long-Run AS (LRAS)?

In the short run, and hence analysing SRAS, at least one of the factors of production is fixed. In the long run, and hence analysing LRAS, all of the factors of production are variable.

What factors influence Short-Run AS (SRAS)? 

1. Changes in the costs of raw materials and energy. An increase in the cost of raw materials and energy is likely to lead to higher costs of production for firms. This will result in an inward shift of the SRAS.
2. Changes in exchange rates. A depreciation in the exchange rate will lead to the cost of imported raw materials rising. This leads to an increase in the costs of production for firms that import their raw materials, leading to an inward shift of the SRAS.
3. Changes in tax rates. An increase in taxes on firms (such as an increase in corporation tax) is likely to lead to an increase in the costs of production for firms, leading to an inward shift of the SRAS.

What are the different shapes of the Long-Run AS (LRAS) curve?

Keynesian Long-Run AS (LRAS) curve:

At low levels of real output, the Keynesian LRAS is perfectly elastic. This is because, at low levels of real output there are likely to be many unemployed resources. Hence, firms can attract resources easily without bidding up their prices. This means that increasing real output will not lead to a corresponding increase in the costs of production and the price level. However, the LRAS becomes more inelastic as the economy approaches full employment of resources. This is because there are fewer unemployed resources, meaning that an increase in real output will lead to a large increase in the costs of production and hence the price level.

Classical Long-Run AS (LRAS) curve:

According to classical economics, the LRAS curve is perfectly inelastic. This is because the classical belief is that, in the long run, the economy reaches full employment of resources. Hence, any changes in aggregate demand will only have an effect on the price level but not real output. Only an outward shift of the LRAS curve would lead to an increase in real output according to classical economics.

What factors influence Long-Run AS (LRAS)?

1. Technological advances. Technological advances are likely to lead to increased productivity and efficiency levels, resulting in an improvement in the productive capacity of the economy, leading to an outward shift of the LRAS curve.
2. Changes in relative productivity. Increasing productivity levels will mean that, given a set amount of resources, an economy will be able to produce more than it could before. This leads to an outward shift of the LRAS curve.
3. Changes in education and skills. Investing in education and improving the skills of the workforce is likely to lead to higher productivity levels. This is likely to lead to an increase in the productive capacity of the economy, leading to an outward shift of the LRAS curve.
4. Changes in government regulations. A government can reduce the amount of regulations it places on businesses. This is likely to lead to an increase in the amount of businesses being created, and will also likely lead to businesses being able to produce more output. This is because regulations normally increase the costs of production and the time taken to produce goods and services for businesses. Hence, a reduction in government regulation on businesses will likely lead to an outward shift of the LRAS curve.
5. Demographic changes and migration. When an economy has an abundance of individuals of working age, LRAS is likely to be high as more goods and services can be produced as there are lots of workers available. Lots of immigration into the country is also likely to help in filling job vacancies and lead to a larger population, likely resulting in an outward shift of the LRAS curve.
6. Competition policy. Increasing the levels of competition in markets is likely to lead to greater efficiency levels, likely leading to an increase in the productive capacity of the economy, leading to an outward shift of the LRAS curve.