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    Equilibrium 3

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    Alex
    Equilibrium occurs where aggregate supply (AS) and aggregate demand (AD) intersect. At prices above equilibrium, suppliers face surpluses and reduce output and prices. At prices below equilibrium, buyers face shortages and pay more, encouraging more production. In the short-run, equilibrium can be above or below full employment but in the long-run it is at the long-run aggregate supply (LRAS) level. Demand shocks shift the AD curve and change output and prices, while supply shocks shift the AS curve with similar effects. The economy self-corrects through adjustments to wages and prices that shift the short-run AS curve over time.

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    Equilibrium 3

    Uploaded by

    Alex
    21 views14 pages
    Equilibrium occurs where aggregate supply (AS) and aggregate demand (AD) intersect. At prices above equilibrium, suppliers face surpluses and reduce output and prices. At prices below equilibrium, buyers face shortages and pay more, encouraging more production. In the short-run, equilibrium can be above or below full employment but in the long-run it is at the long-run aggregate supply (LRAS) level. Demand shocks shift the AD curve and change output and prices, while supply shocks shift the AS curve with similar effects. The economy self-corrects through adjustments to wages and prices that shift the short-run AS curve over time.

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    Equilibrium occurs where aggregate supply (AS) and aggregate demand (AD) intersect. At prices above equilibrium, suppliers face surpluses and reduce output and prices. At prices below equilibrium, buyers face shortages and pay more, encouraging more production. In the short-run, equilibrium can be above or below full employment but in the long-run it is at the long-run aggregate supply (LRAS) level. Demand shocks shift the AD curve and change output and prices, while supply shocks shift the AS curve with similar effects. The economy self-corrects through adjustments to wages and prices that shift the short-run AS curve over time.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    21 views14 pages

    Equilibrium 3

    Uploaded by

    Alex
    Equilibrium occurs where aggregate supply (AS) and aggregate demand (AD) intersect. At prices above equilibrium, suppliers face surpluses and reduce output and prices. At prices below equilibrium, buyers face shortages and pay more, encouraging more production. In the short-run, equilibrium can be above or below full employment but in the long-run it is at the long-run aggregate supply (LRAS) level. Demand shocks shift the AD curve and change output and prices, while supply shocks shift the AS curve with similar effects. The economy self-corrects through adjustments to wages and prices that shift the short-run AS curve over time.

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    You are on page 1of 14

    Equilibrium

    • Equilibrium price and quantity are found


    where the AD and AS curves intersect.
    – At any price level above equilibrium sellers
    are faced with surpluses and are forced to
    reduce production and price level.
    – At any price level below equilibrium buyers
    are faced with shortages and are forced to
    pay more, encouraging suppliers to produce
    more.
    Equilibrium
    Price
    Level Short-run
    aggregate
    supply

    Equilibrium A
    price

    Aggregate
    demand
    0 Equilibrium Quantity of
    output Output
    Equilibrium
    • In the short run equilibrium may be above
    or below the full employment rate. In other
    words AD and AS may not intersect at the
    LRAS.
    • In the long run equilibrium will be at the
    LRAS, because in the long-run short run
    AS will have adjusted so that short-run
    aggregate output is equal to the potential
    output.
    Short-run Equilibrium Below Full
    Employment Potential Output
    (recessionary gap)
    LRAS
    Price Level

    AS

    PL1

    AD

    Q1 FE RGDP
    Short run Equilibrium Above Full
    Employment Potential Output
    (inflationary gap)

    LRAS
    Price Level

    AS

    PL1

    AD

    Q1 FE RGDP
    Changes in AD
    • Increases in AD cause the price level and
    the level of output and employment to rise.
    • This rise in price level is known as
    demand-pull inflation.
    • Decreases in AD cause the price level and
    the level of output and employment to fall.
    • Increases or decreases in AD are known
    as Demand Shocks
    Increases in AD

    LRAS
    Price Level

    AS

    PL2

    PL1

    AD2
    AD

    Q1 FE ,Q2 RGDP
    Changes in AS

    Increases in AS have a positive


    effect on both price level and
    output.
    – When AS shifts right, price levels
    fall or stabilize, but output
    increases.
    Increases in AS

    LRAS
    Price Level

    AS
    AS1

    PL
    PL1

    AD

    FE Q1 RGDP
    Changes in AS

    Decreases in AS have a negative effect on


    both price level and output.
    – When AS shifts left, price levels rise, but
    output falls.
    •This is known as cost-push inflation or
    stagflation.
    •Any unexpected change in AS whether
    positive or negative is known as a supply
    shock.
    Decreases in AS
    (stagflation)
    LRAS
    Price Level

    AS2
    AS

    PL2
    PL1

    AD

    Q2 Q1 FE RGDP
    Self-Correcting Nature of
    Economy
    • In the long-run aggregate supply will shift
    so that equilibrium will be at the long-run
    level of output
    • This happens as nominal wages and other
    input prices adjust to meet the current
    price level
    Short run Equilibrium Below Full Employment
    -Lower price levels lead to lower wages,
    shifting SRAS right

    LRAS
    Price Level

    AS
    AS2

    PL1

    PL2
    AD

    Q1 FE ,Q2 RGDP
    Short run Equilibrium Above Full
    Employment
    -Higher price levels lead to higher wages,
    shifting SRAS left
    LRAS
    Price Level

    AS2
    AS

    PL1

    AD1

    FE Q1 RGDP

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