Cost-Push Inflation – SRAS Leftward Shift
Macroeconomics
This 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.
Cost-push inflation occurs when the costs of production increase, causing firms to reduce supply at each price level.
This is shown in the diagram by a shift from SRAS2 to SRAS1.
The initial equilibrium is at PL1 and Y1, where AD intersects SRAS2.
After the shift to SRAS1, the new equilibrium is at a higher price level PL2 and lower output Y2.
This scenario leads to stagflation—higher inflation and lower real GDP.
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