Macroeconomic Equilibrium :: Economics

Macroeconomic EquilibriumIntroductionMacroeconomic equilibrium for an economy in the short run isestablished when mass demand intersects with short-run compound picture. At the price level Pe, the aggregate demand for goods and services isequal to the aggregate come out of payoff. The widening and the generalprice level in the economy will tend to adjust towards thisequilibrium position.If the price level is too high, on that point will be an excess supply ofoutput. If the price level is below equilibrium, in that respect will be excessdemand in the short run. In both situations there should be a processtaking the economy towards the equilibrium level of output.Consider for example a situation where aggregate supply is greaterthan current demand. This will lead to a build up in stocks(inventories) and this sends a signal to producers either to cutprices (to stimulate an increase in demand) or to reduce output so asto reduce the build up of excess stocks. Either way - there is atendency for output to move closer to the current level of demand.There may be occasions when in the short run, the economy cannot meetan increase in demand. This is to a greater extent likely to occur when an economyreaches full-employment of factor resources. In this situation, theaggregate supply curve in the short run becomes increasinglyinelastic.The diagram below tracks the ensnare of this. We see aggregate demandrising but the economy finds it difficult to raise (expand) take. There is a small increase in real matter output, but themain marrow is to put upward pressure on the general price level.Shortages of resources will lead to a general rise in be and prices.Impact of a change in aggregate supplySuppose that increased efficiency and productivity together with lowerinput be (e.g. of essential raw materials) causes the short runaggregate supply curve to shift outwards. (I.e. an increase in supply- assume no shift in aggregate demand).The diagram below shows what is likely to happen. AS shifts outwardsand a new macroeconomic equilibrium will be established. The pricelevel has locomote and real national output (in equilibrium) hasincreased to Y2.Aggregate supply would shift inwards if there is a rise in the unitcosts of product in the economy. For example there might be a risein unit wage costs perhaps caused by higher return not compensated forby higher labour productivity.External economic shocksmight also cause the aggregate supply curve toshift inwards. For example a sharp rise in global commodity prices. IfAS shifts to the left, assuming no change in the aggregate demandcurve, we expect to see a higher price level (this is known asMacroeconomic Equilibrium EconomicsMacroeconomic EquilibriumIntroductionMacroeconomic equilibrium for an economy in the short run isestablished when aggregate demand intersects with short-run aggregatesupply. At the price level Pe, the aggregate demand for goods and services isequal to the aggregate supply o f output. The output and the generalprice level in the economy will tend to adjust towards thisequilibrium position.If the price level is too high, there will be an excess supply ofoutput. If the price level is below equilibrium, there will be excessdemand in the short run. In both situations there should be a processtaking the economy towards the equilibrium level of output.Consider for example a situation where aggregate supply is greaterthan current demand. This will lead to a build up in stocks(inventories) and this sends a signal to producers either to cutprices (to stimulate an increase in demand) or to reduce output so asto reduce the build up of excess stocks. Either way - there is atendency for output to move closer to the current level of demand.There may be occasions when in the short run, the economy cannot meetan increase in demand. This is more likely to occur when an economyreaches full-employment of factor resources. In this situation, theaggregate supply curve in th e short run becomes increasinglyinelastic.The diagram below tracks the effect of this. We see aggregate demandrising but the economy finds it difficult to raise (expand)production. There is a small increase in real national output, but themain effect is to put upward pressure on the general price level.Shortages of resources will lead to a general rise in costs and prices.Impact of a change in aggregate supplySuppose that increased efficiency and productivity together with lowerinput costs (e.g. of essential raw materials) causes the short runaggregate supply curve to shift outwards. (I.e. an increase in supply- assume no shift in aggregate demand).The diagram below shows what is likely to happen. AS shifts outwardsand a new macroeconomic equilibrium will be established. The pricelevel has locomote and real national output (in equilibrium) hasincreased to Y2.Aggregate supply would shift inwards if there is a rise in the unitcosts of production in the economy. For example there migh t be a risein unit wage costs perhaps caused by higher honorarium not compensated forby higher labour productivity.External economic shocksmight also cause the aggregate supply curve toshift inwards. For example a sharp rise in global commodity prices. IfAS shifts to the left, assuming no change in the aggregate demandcurve, we expect to see a higher price level (this is known as