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Oil Prices and Short Run Aggregate Supply - Chains of Reasoning

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 30 Jan 2022

Here is a short video building an analytical chain of reasoning on how rising oil prices might impact on a country's short-run aggregate supply.

Oil Prices and Short Run Aggregate Supply - Chains of Reasoning

Oil Prices and Short Run Aggregate Supply

World oil prices rise by 30%. Analyse the main effect of this on aggregate supply for a country that is a net oil importer.

Analytical chain of reasoning

  • A rise in world oil prices will increase import costs for many producers such as the major power companies and transport logistics businesses.
  • Assuming other costs remain unchanged (ceteris paribus), this rise in oil prices will lead to an inward shift of supply across many industries.
  • As a result, short run aggregate supply (SRAS) will also shift inwards. SRAS is drawn on the assumption that factors such as the state of technology remain unchanged.
  • This means that national output of goods and services at each price level has fallen.
  • Consequently, the likely result is the prices will rise (via cost-push inflation) and that real GDP will contract leading to a slowdown or possible economic recession

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