Short-Run Equilibrium

Definition

Short-run equilibrium refers to the state of balance between aggregate demand and aggregate supply in an economy when at least one factor of production, such as capital or technology, is fixed. This equilibrium represents the point where the quantity of output demanded equals the quantity of output supplied in the short-term, given the constraints on production.

5 Must Know Facts For Your Next Test

1. In the short run, at least one factor of production, such as capital or technology, is fixed, limiting the ability of firms to adjust their output levels.
2. The short-run aggregate supply curve is upward-sloping, reflecting the law of diminishing returns as firms increase production with the fixed factor of production.
3. Short-run equilibrium is achieved when the quantity of output demanded equals the quantity of output supplied, determined by the intersection of the short-run aggregate supply and aggregate demand curves.
4. Changes in aggregate demand, such as shifts in consumer spending, investment, government spending, or net exports, can lead to changes in short-run equilibrium output and the price level.
5. Factors that can shift the short-run aggregate supply curve include changes in input prices, changes in productivity, or changes in the number of firms in the market.

Review Questions

• Explain how the concept of short-run equilibrium is related to the model of aggregate demand and aggregate supply.
  • The short-run equilibrium is determined by the intersection of the short-run aggregate supply curve and the aggregate demand curve. In the short run, at least one factor of production is fixed, limiting the ability of firms to adjust their output levels. The upward-sloping short-run aggregate supply curve reflects the law of diminishing returns, as firms increase production with the fixed factor. Changes in aggregate demand, such as shifts in consumer spending, investment, government spending, or net exports, can lead to changes in short-run equilibrium output and the price level. Additionally, factors that can shift the short-run aggregate supply curve, like changes in input prices or productivity, can also affect the short-run equilibrium.
• Describe how the concept of short-run equilibrium differs from the concept of long-run equilibrium in the model of aggregate demand and aggregate supply.
  • The key difference between short-run equilibrium and long-run equilibrium is the flexibility of the factors of production. In the short run, at least one factor of production, such as capital or technology, is fixed, limiting the ability of firms to adjust their output levels. This results in an upward-sloping short-run aggregate supply curve. In the long run, however, all factors of production can be adjusted, allowing firms to move along a flatter, horizontal long-run aggregate supply curve. The long-run equilibrium is represented by the intersection of the long-run aggregate supply and aggregate demand curves, which may differ from the short-run equilibrium point. The long-run equilibrium reflects the economy's ability to adjust all inputs and reach a state of balance between the quantity of output demanded and the quantity of output supplied.
• Analyze how changes in aggregate demand or aggregate supply can affect the short-run equilibrium in the economy.
  • Changes in aggregate demand or aggregate supply can significantly impact the short-run equilibrium in the economy. If aggregate demand increases, perhaps due to an increase in consumer spending or government spending, the aggregate demand curve will shift to the right. This will lead to a new short-run equilibrium with a higher price level and a higher level of output. Conversely, a decrease in aggregate demand will shift the curve to the left, resulting in a new short-run equilibrium with a lower price level and a lower level of output. Similarly, changes in aggregate supply can also affect the short-run equilibrium. For example, an increase in input prices or a decrease in productivity will shift the short-run aggregate supply curve to the left, leading to a new short-run equilibrium with a higher price level and a lower level of output. Understanding how these changes in aggregate demand and supply can influence the short-run equilibrium is crucial for policymakers and economists to effectively manage the economy in the short term.

Related terms

Aggregate Demand:

The total demand for all final goods and services in an economy at a given price level and time.

Aggregate Supply:

The total quantity of final goods and services that firms are willing to sell at different price levels in a given time period.

Long-Run Equilibrium:

The state of balance between aggregate demand and aggregate supply when all factors of production can be adjusted, typically represented by the intersection of the long-run aggregate supply and aggregate demand curves.