SRAS (Keynesian AS)
By: Haodi Zhang

Definition
 “The total amount of goods and services
that all the firms in all the industries in a
country will produce at every price level in a
given period of time. “

Economics Textbook p. 274
 SRAS
Average Price Level
SRAS
Maynard Keynes
Inelastic Area
P2
P1
Early 20th-century economist
Elastic Area
Y1
Y2
Real GDP
SRAS Below Full-Employment
Average Price Level
LRAS
SRAS
PE
AD
1
YFE
Real GDP

Full employment-level
of output

Very low
unemployment

Stable price (low
inflation)

Resources are generally
being used efficiently
and near their full
capacity
SRAS Below Full-Employment
Average Price Level
LRAS
SRAS
PE
P1
AD2
AD
1
Y1
Real GDP
YFE

Decrease in AD

Fall in price level and
output (real GDP)

Equilibrium falls

Workers are laid off

Small decrease in price
level leads to a large
decrease in output
SRAS Below Full-Employment
Average Price Level
LRAS
SRAS

Further decrease in AD

Further fall in price
level and output (real
GDP)

Equilibrium falls

More workers are laid
off

The decline in output is
proportionally larger
than the decline in
price level, due to the
high elasticity under
full-employment level
PE
P1
P2
AD
AD2
3
Y2
AD
1
Y1
Real GDP
YFE
Why are workers laid off?
 Firms must lower the price due to
fall in demand
 Wages and prices are inflexible in
the short run, therefore, wage
cannot be reduced
 “Fixed-wage period”
 Labor market rigidities protect
workers from low wages
Labor Market Rigidities
 Government regulations
 Minimum wage laws
 Wage agreement with labor
unions
 Workers contract
SRAS Beyond Full-Employment
Average Price Level
LRAS
SRAS
P2
P1
PE
AD
3
AD2
AD
1
YFE Y1 Y2
Real GDP

AD rises

Small increase in output
and increase in average
price level (inflation)

Production beyond full
employment level
How is production beyond full-employment possible?
 Full-employment does not mean zero
unemployment
 There are still workers who are willing
and able to work but are employed
 It is when the unemployment is low
and stable
 Nearly all the land, capital and labor
are engaged in production of goods
What happens to workers?
 More workers are employed in
response to the high demand
 Unemployment falls
 Workers becomes scarce so output
increases at a decreasing rate
Cause of Increase in SRAS
G • Government subsidies to producers
I
• Improvement in productivity
R
• Reduction in minimum wage
L
• Lower resource cost
S
• Stronger currency
B
• Better infrastructure
F
• Fall in wage rate
Right-Ward Shift of SRAS
LRAS
SRAS1

Increase in output and
decrease in price

Increase in employment

Becomes more efficient
in production
Average Price Level
SRAS2
PE
P1
AD
1
YFE
Real GDP
Y1
Causes of Decrease in SRAS
H • Higher business taxes
I • Increase in resource costs
W • Weaker currency
I • Increase in minimum wage
Left-Ward Shift of SRAS
LRAS
SRAS1
Average Price Level
SRAS2
P1
PE
AD
1
Y1
Real GDP
YFE

Decrease in output and
increase in price

Decrease in
employment

Lead to inflation and
decline in real GDP
Real World Example
 Japan does not lay off workers but rather decreases
their wages
 Therefore, full capacity is never met because of the
lack of efficiency
 When the AD decreases, the SRAS does not adjust
to the full capacity
 There is a simple decrease in price and real GDP
http://www.bbc.co.uk/news/business-21136866
Japan’s SRAS (export)
LRAS1
SRAS1
LRAS1

Japan does not lay off
workers but rather
decreases their wages

Therefore, full capacity
is never met because of
the lack of efficiency

When the AD decreases,
the SRAS does not
adjust to the full
capacity

There is a decrease in
price and increase in
real GDP
Average Price Level
SRAS2
P1
P2
AD
1
Y1
Real GDP
Y2
Conclusion
Average Price Level
LRAS
SRAS

The total amount of
goods a country will
produce at every price
level in a given period of
time.

There is a elastic and
inelastic zone

LRAS indicated fullemployment
PE
AD
1
Real GDP
YFE