2.4.3 Equilibrium Level of Real National Output (Macro)

Equilibrium Level of Real National Output

The equilibrium level of real national output is the level of real GDP where aggregate demand (AD) equals aggregate supply (AS), meaning planned spending equals total output in the economy.

SHORT RUN EQUILIBRIUM

Short-run equilibrium occurs at the point where aggregate demand (AD) intersects short-run aggregate supply (SRAS). At this level of equilibrium, real national output may differ from potential output.

If equilibrium output is above potential output, the economy experiences an inflationary gap, whereas if equilibrium output is below potential output, the economy experiences a deflationary (recessionary) gap.

LONG RUN EQUILIBRIUM

Long-run equilibrium occurs when aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) all intersect at the same level of output.

At this point, real national output is equal to potential output. The economy therefore experiences no demand-deficient unemployment and no inflationary pressure.

DISEQUILIBRIUM AND ADJUSTMENT

Disequilibrium is an economic state where market forces, specifically supply and demand, are unbalanced, causing surpluses or shortages due to price mismatches.

Occurs when the price of a good or service does not equate to the quantity supplied with the quantity demanded.

CHANGES IN EQUILIBRIUM OUTPUT

Equilibrium output (real GDP) changes when Aggregate Demand (AD) or Short-Run Aggregate Supply (SRAS) curves shift, altering the intersection point with the price level.

UNDERSTANDING AD/AS DIAGRAMS

• Diagrams showing how shifts in aggregate demand (AD) and aggregate supply (AS) affect real GDP and price level (PL)

• Includes short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS)  and classical and Keynesian view of LRAS curves. --> (SRAS), 1 factor of production is fixed, shows changes in production costs

LONG RUN AGGREGATE SUPPLY

In the long run, the economy has time to adjust. Because of this flexibility, the overall price level does not affect real output in the long run. Instead, output is determined by real, supply-side factors,

SHORT RUN AGGREGATE SUPPLY

It is the total quantity of goods and services that firms in an economy are willing and able to produce at different price levels in the short run, thus some costs of production do not adjust quickly. At least one input price (especially wages) is fixed.