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
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