How do commodity prices impact the AS curve?

Commodity prices directly impact the Aggregate Supply (AS) curve by influencing production costs.

Commodity prices are a significant determinant of the costs of production for many goods and services. Commodities such as oil, metals, and agricultural products are used as inputs in various industries. When the prices of these commodities rise, it increases the cost of production for firms. This is because commodities are often a significant part of a company's input costs. For instance, a rise in oil prices would increase the cost of transportation, which would, in turn, increase the cost of production for many goods.

In the context of the AS curve, which shows the total quantity of goods and services that firms are willing and able to supply at different price levels, an increase in commodity prices would lead to a decrease in aggregate supply. This is represented by a leftward shift of the AS curve. The reason for this is that as production costs increase, firms are less willing or able to supply the same quantity of goods at the previous price levels. They may need to reduce production or increase prices to cover the higher costs.

Conversely, a decrease in commodity prices would lower production costs and increase aggregate supply, leading to a rightward shift of the AS curve. Firms would be more willing and able to supply a greater quantity of goods at the same price levels, or they could maintain the same level of production and lower prices.

It's important to note that the impact of commodity prices on the AS curve is dependent on the elasticity of supply. If supply is inelastic, a change in commodity prices will have a smaller effect on the quantity supplied. On the other hand, if supply is elastic, a change in commodity prices will have a larger effect on the quantity supplied.

In conclusion, commodity prices play a crucial role in determining the position and shape of the AS curve. Understanding this relationship is key to analysing the effects of economic shocks and policy decisions on the overall economy.