AD-AS Model: Equilibrium in the Short Run and Long Run: Videos & Practice Problems

In the context of the Aggregate Demand and Aggregate Supply (ADAS) model, understanding equilibrium is crucial for analyzing economic performance. Equilibrium occurs when the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves intersect. This intersection signifies a balance between the total quantity of goods and services demanded and supplied at a specific price level.

In the long run, equilibrium is represented graphically where all three curves meet at a single point. The AD curve is typically downward sloping, indicating that as the price level decreases, the quantity of goods demanded increases. Conversely, the SRAS curve slopes upward, reflecting that higher prices incentivize producers to supply more goods in the short run. The LRAS curve is vertical, representing the economy's potential output at full employment, unaffected by price changes in the long run.

To visualize this, imagine a graph where the vertical axis represents the price level and the horizontal axis represents real GDP. The intersection of the AD, SRAS, and LRAS curves indicates the long-run equilibrium price level and the corresponding GDP. This point is essential as it reflects the economy's capacity to produce goods and services sustainably.

In contrast, short-run equilibrium occurs when the AD and SRAS curves intersect, which may not align with the LRAS. This situation can lead to economic fluctuations, such as inflation or recession, depending on shifts in demand or supply. Understanding these dynamics helps in analyzing how various factors, such as fiscal policy or external shocks, can impact overall economic stability.

In summary, the ADAS model provides a comprehensive framework for examining how aggregate demand and supply interact to determine equilibrium in both the short and long run. Recognizing the significance of these intersections aids in grasping the broader implications for economic policy and performance.

In economic analysis, understanding the distinction between short-run and long-run equilibrium is crucial. In the short run, the economy may not be in long-run equilibrium, which is characterized by the intersection of aggregate demand (AD) and long-run aggregate supply (LRAS). For instance, if aggregate demand shifts to the left, this can lead to a new short-run equilibrium where the short-run aggregate supply (SRAS) intersects with the shifted aggregate demand curve.

The short-run equilibrium is determined at the point where the short-run aggregate supply meets the new aggregate demand. This intersection indicates the current price level and GDP in the short run, which may differ from the long-run equilibrium. It is important to note that while aggregate demand can shift, there is no separate short-run aggregate demand; it remains a singular concept that interacts with the short-run aggregate supply.

To visualize these changes effectively, it can be helpful to use different colors for the original and new curves. This method clarifies the shifts in aggregate demand or supply and highlights the resulting short-run equilibrium. The key takeaway is that the short-run equilibrium does not necessarily align with the long-run equilibrium, where all three curves—aggregate demand, short-run aggregate supply, and long-run aggregate supply—intersect.