Aggregate supply - long run equilibrium:graphical analysis, Macroeconomics

Assignment Help:

Long Run Equilibrium:Graphical Analysis

In the long run the natural rate of output is the level of output to which the economy will tend to adjust in the long run. This indicates that in the long run the average price level has no effect on the level of output (Y). As discussed earlier, any unanticipated price rise in the short run will be offset in the long run by an increase in costs as contracts with the suppliers of inputs are renegotiated. Therefore, in the long run the output of an economy does not depend on the price level, but on factors such as, labor import costs, capital stock, technological progress, etc. These factors are not influenced by changes in the average price level and so is the case with aggregate supply in the long run. Therefore, as shown in figure 6.5, in the long run the aggregate supply curve of an economy is vertical at the natural rate of output.

Figure shows the relationship among aggregate demand curve (AD), the short run aggregate supply curve (AS) and the long run aggregate supply curve (ASL). The output demanded and supplied per period of time, say per year, are designated by Q. Recall that the natural rate of output (Q) is not the same as the level of output achieved in the short run when all resources are fully employed. At this level of output there are unemployed resources caused by lack of mobility and other labor market rigidities which cannot be reduced by raising aggregate demand.

Figure: Aggregate Supply in the short run and in the long run

487_aggregate supply in short and long run.png

 

Figure: Short Run and Long Run Equilibrium between Aggregate Demand and Aggregate Supply

1994_aggregate supply in short and long run1.png

It is shown that as long as aggregate demand and aggregate supply conditions for the natural rate of output continue to be those represented by the AD, ASS and ASL curves the market for this output can be in equilibrium condition provided the output actually supplied and demanded is at Q and the price is P. Only this combination of price level (P) and quantity demanded (Q) will clear the market, leaving no excess supply or no excess demand.

From this analysis, there are at least two important points that will be useful for our later analysis. They are (i) market equilibrium is not determined by aggregate demand conditions alone, not by supply conditions alone, but by a combination of both (ii) both the price level and the natural rate of output and sales are determined simultaneously.


Related Discussions:- Aggregate supply - long run equilibrium:graphical analysis

Live around a hazardous waste dump, : Suppose that 100 people live around a...

: Suppose that 100 people live around a hazardous waste dump. If the people continue to live there for 20 years, one of them will likely contract a painful, non-fatal cancer that w

Increase in income, How does an increase in income affect a consumer's budg...

How does an increase in income affect a consumer's budget line and their total utility?

Action result in a deadweight loss, The short-run supply of a certain crop ...

The short-run supply of a certain crop is perfectly inelastic, because it has already been harvested and no more of it can be grown until the next growing season. In order to raise

Explain about IS-LM-model, Q. Explain about IS-LM-model? The key differ...

Q. Explain about IS-LM-model? The key difference between the IS-LM model and the cross model is that nominal interest rate is exogenous in cross model on the other handit is en

Define the labor market, Q. Define the Labor Market? A significant macr...

Q. Define the Labor Market? A significant macroeconomic variable is the total amount of labor which is used in a certain time period. Amount of labor and amount of capital are

MR, Question 1: Consider a two-period, two-person pure exchange economy. Ut...

Question 1: Consider a two-period, two-person pure exchange economy. Utility functions and endowments are given as follows. u1(x0; x1) = (x0x1)2 and e1 = (18; 4) u2(x0; x1) = ln x0

Factors influence group members, Norms influence behavior conformity among ...

Norms influence behavior conformity among group members. What factors will influence group members to conform to a group's norms, and when will members remain independent? Do indiv

Important points about the classic model, Q. Important points about the cla...

Q. Important points about the classic model? The most important points about the classic model are as following:  Monetary and fiscal policy can't affect the GDP or unem

Threaten the formal right to give blood, Singer suggests that although the ...

Singer suggests that although the right to sell blood does not threaten the formal right to give blood, it is incompatible with "the right to give blood, which cannot be bought, wh

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd