Macroeconomic equilibrium occurs when aggregate supply and demand meet

macroeconomic equilibrium occurs when aggregate supply and demand meet

Answer to Question Short-run macroeconomic equilibrium occurs when: aggregate demand and short-run aggregate supply intersect. the. Short-run macroeconomic equilibrium occurs when the quantity of real GDP Long-run equilibrium occurs where the AD and LAS curves intersect and results which increases aggregate demand by more than long-run aggregate supply. Macroeconomic equilibrium occurs when aggregate supply and aggregate demand meet. What does this indicate about society? Society's.

Introduction In order for a macroeconomic model to be useful, it needs to show what determines total supply or total demand for the economy and how total demand and total supply interact at the macroeconomic level. We have a model like this! We can find this point on the diagram below; it's where the aggregate supply, AS, and aggregate demand, AD, curves intersect, showing the equilibrium level of real GDP and the equilibrium price level in the economy.

Aggregate Demand and Aggregate Supply

At a relatively low price level for output, firms have little incentive to produce, although consumers would be willing to purchase a high quantity. As the price level for outputs rises, aggregate supply rises and aggregate demand falls until the equilibrium point is reached. The graph shows a downward sloping aggregate demand curve that intersects with an upward sloping aggregate supply curve at the point 8, Aggregate supply and aggregate demand.

macroeconomic equilibrium occurs when aggregate supply and demand meet

Confusion sometimes arises between the macroeconomic aggregate supply and aggregate demand model and the microeconomic analysis of demand and supply in particular markets for goods, services, labor, and capital. While they may have superficial resemblance, their underlying differences are much greater. For example, the vertical and horizontal axes have distinctly different meanings in macroeconomic and microeconomic diagrams.

The vertical axis of a microeconomic demand and supply diagram expresses a price—or wage or rate of return—for an individual good or service. This price is implicitly relative; it is intended to be compared with the prices of other products—for example, the price of pizza relative to the price of fried chicken. In contrast, the vertical axis of an aggregate supply and aggregate demand diagram expresses the level of a price index like the Consumer Price Index or the GDP deflator—combining a wide array of prices from across the economy.

Interpreting the aggregate demand/aggregate supply model

The aggregate supply curve. The vertical axis shows the price level.

macroeconomic equilibrium occurs when aggregate supply and demand meet

Price level is the average price of all goods and services produced in the economy. It's an index number, like the GDP deflator.

Interpreting the aggregate demand/aggregate supply model (article) | Khan Academy

Wait, what's a GDP deflator again? The GDP deflator is a price index measuring the average prices of all goods and services included in the economy. Notice on the graph that as the price level rises, the aggregate supply—quantity of goods and services supplied—rises as well.

macroeconomic equilibrium occurs when aggregate supply and demand meet

Why do you think this is? The price level shown on the vertical axis represents prices for final goods or outputs bought in the economy, not the price level for intermediate goods and services that are inputs to production.

Aggregate demand and aggregate supply curves

The AS curve describes how suppliers will react to a higher price level for final outputs of goods and services while the prices of inputs like labor and energy remain constant. If firms across the economy face a situation where the price level of what they produce and sell is rising but their costs of production are not rising, then the lure of higher profits will induce them to expand production.

Potential GDP If you look at our example graph above, you'll see that the slope of the AS curve changes from nearly flat at its far left to nearly vertical at its far right.

  • Key points
  • The Slope of the Aggregate Demand Curve
  • Equilibrium in the AD-AS Model

At the far left of the aggregate supply curve, the level of output in the economy is far below potential GDP—the quantity that an economy can produce by fully employing its existing levels of labor, physical capital, and technology, in the context of its existing market and legal institutions.

At these relatively low levels of output, levels of unemployment are high, and many factories are running only part-time or have closed their doors. In this situation, a relatively small increase in the prices of the outputs that businesses sell—with no rise in input prices—can encourage a considerable surge in the quantity of aggregate supply—real GDP—because so many workers and factories are ready to swing into production.

As the quantity produced increases, however, certain firms and industries will start running into limits—for example, nearly all of the expert workers in a certain industry could have jobs or factories in certain geographic areas or industries might be running at full speed.

In the intermediate area of the AS curve, a higher price level for outputs continues to encourage a greater quantity of output, but as the increasingly steep upward slope of the aggregate supply curve shows, the increase in quantity in response to a given rise in the price level will not be quite as large.

At the far right, the aggregate supply curve becomes nearly vertical. At this quantity, higher prices for outputs cannot encourage additional output because even if firms want to expand output, the inputs of labor and machinery in the economy are fully employed.

In our example AS curve, the vertical line in the exhibit shows that potential GDP occurs at a total output of 9, When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low at the natural rate of unemployment. The aggregate supply curve is typically drawn to cross the potential GDP line.

This shape may seem puzzling—How can an economy produce at an output level which is higher than its potential or full-employment GDP? The economic intuition here is that if prices for outputs were high enough, producers would make fanatical efforts to produce: Such hyper-intense production would go beyond using potential labor and physical capital resources fully to using them in a way that is not sustainable in the long term.

Thus, it is indeed possible for production to sprint above potential GDP, but only in the short run. So, in the short run, it is possible for producers to supply less or more GDP than potential if demand is too low or too high.

In the long run, however, producers are limited to producing at potential GDP.