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This diagram illustrates cost-push inflation caused by a leftward shift in the short-run aggregate supply (SRAS) curve.
AD: Aggregate demand curve, assumed constant in this case.
SRAS2: Initial short-run aggregate supply before the cost increase.
SRAS1: New, lower short-run aggregate supply after the cost increase.
LRAS: Long-run aggregate supply, assumed fixed at full employment output Y1.
Y1: Full employment level of output before the SRAS shift.
Y2: New, lower level of output after the SRAS shift.
PL1: Original price level before the SRAS shift.
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.
Explore other diagrams from the same unit to deepen your understanding
A diagram illustrating the fluctuations in real GDP over time, including periods of boom, recession, peak, and trough, relative to the long-term trend of economic growth.
This diagram shows the intersection of the aggregate demand (AD) and short-run aggregate supply (AS) curves to determine the equilibrium price level and real GDP.
A diagram showing the Classical model of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS), used to explain long-run macroeconomic equilibrium.
A Keynesian aggregate demand and long-run aggregate supply (AD–LRAS) diagram showing how real GDP and the price level interact across different phases of the economy, including spare capacity and full employment.
A diagram showing an output (deflationary) gap, where the economy is producing below its full employment level of output (Ye).
A macroeconomic PPC diagram illustrating the trade-off between producing consumer goods and capital goods, highlighting opportunity cost and future growth implications.
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