Presentation on theme: "Equilibrium Equilibrium price and quantity are found where the AD and AS curves intersect. At any price level above equilibrium sellers are faced with."— Presentation transcript:
1 EquilibriumEquilibrium 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.
3 EquilibriumIn 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.
5 Short run Equilibrium Above Full Employment Potential Output (inflationary gap) LRASPrice LevelASPL1ADQ1FERGDP
6 Changes in ADIncreases 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
7 Increases in ADLRASPrice LevelASPL2PL1AD2ADQ1FE,Q2RGDP
8 Increases in AS have a positive effect on both price level and output. Changes in ASIncreases in AS have a positive effect on both price level and output.When AS shifts right, price levels fall or stabilize, but output increases.
9 Increases in ASLRASPrice LevelASAS1PLPL1ADFEQ1RGDP
10 Changes in ASDecreases 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.
11 Decreases in AS (stagflation) LRASAS2Price LevelASPL2PL1ADQ2Q1FERGDP
12 Self-Correcting Nature of Economy In the long-run aggregate supply will shift so that equilibrium will be at the long-run level of outputThis happens as nominal wages and other input prices adjust to meet the current price level
13 Short run Equilibrium Below Full Employment -Lower price levels lead to lower wages, shifting SRAS rightLRASPrice LevelASAS2PL1PL2ADQ1FE,Q2RGDP
14 Short run Equilibrium Above Full Employment -Higher price levels lead to higher wages, shifting SRAS leftLRASAS2Price LevelASPL1AD1FEQ1RGDP