Transcript Equilibrium - Granbury ISD

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
Equilibrium
price
0
Short-run
aggregate
supply
A
Equilibrium
output
Aggregate
demand
Quantity of
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)
Price Level
LRAS
AS
PL1
Q1
FE
RGDP
Short run Equilibrium Above Full
Employment Potential Output
(inflationary gap)
Price Level
LRAS
AS
PL1
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
Price Level
LRAS
AS
PL2
PL1
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.
Price Level
Increases in AS
LRAS
AS
AS1
PL
PL1
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)
Price Level
LRAS
AS2
AS
PL2
PL1
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
Price Level
LRAS
AS
AS2
PL1
PL2
Q1
FE ,Q2
RGDP
Short run Equilibrium Above Full
Employment
-Higher price levels lead to higher wages,
shifting SRAS left
Price Level
LRAS
AS2
AS
PL1
FE
Q1
RGDP