Cost-Push Inflation – SRAS Leftward ShiftSL
MacroeconomicsThis diagram illustrates cost-push inflation caused by a leftward shift in the short-run aggregate supply (SRAS) curve.
Curves and elements
- ad
- AD: Aggregate demand curve, assumed constant in this case.
- sras2
- SRAS2: Initial short-run aggregate supply before the cost increase.
- sras1
- SRAS1: New, lower short-run aggregate supply after the cost increase.
- lras
- LRAS: Long-run aggregate supply, assumed fixed at full employment output Y1.
- y1
- Y1: Full employment level of output before the SRAS shift.
- y2
- Y2: New, lower level of output after the SRAS shift.
- pl1
- PL1: Original price level before the SRAS shift.
- pl2
- PL2: New, higher price level after the SRAS shift.
Key explanations
- 1
Cost-push inflation occurs when the costs of production increase, causing firms to reduce supply at each price level.
- 2
This is shown in the diagram by a shift from SRAS2 to SRAS1.
- 3
The initial equilibrium is at PL1 and Y1, where AD intersects SRAS2.
- 4
After the shift to SRAS1, the new equilibrium is at a higher price level PL2 and lower output Y2.
- 5
This scenario leads to stagflation—higher inflation and lower real GDP.
Example exam question
Using an AD/AS diagram, explain how cost-push inflation can occur in an economy.
Show example answer
Cost-push inflation occurs when the SRAS curve shifts leftward due to rising production costs, such as wages or raw materials. In the diagram, SRAS shifts from SRAS2 to SRAS1, leading to a higher price level (PL2) and lower output (Y2). This creates inflation alongside falling output, a situation known as stagflation.
