Equilibrium output and simultaneous shifts
| English | 中文 | Pinyin |
|---|---|---|
| equilibrium real output | 均衡实际产出 | jūn héng shí jì chǎn chū |
| aggregate supply shift | 总供给移动 | zǒng gōng jǐ yí dòng |
A decision you can investigate
- A rise in planned spending and a fall in production cost can occur together. Both can raise real output, while their price effects oppose one another.
- A single definite price prediction needs information about their relative size.
Build the explanation
- Equilibrium real output 均衡实际产出 in the AD/AS model is the output level at which planned aggregate spending and supply are consistent at the associated general price level. It need not be potential output or maximum employment. An AD shift changes equilibrium along unchanged supply; an aggregate supply shift 总供给移动 changes equilibrium along unchanged demand.
- Increased AD can raise output and the price level in an upward-sloping SRAS region. Increased supply can raise output and lower the price level. When both AD and AS shift outward, real output normally rises in the stated model but the price-level direction needs their relative magnitudes. Supply shape and time horizon matter; classical long-run output at unchanged capacity has a different response.
Work through the evidence
- Use fictional inverse schedules in index units: AD is P=140−2Y; SRAS is P=20+Y. Equilibrium requires 140−2Y=20+Y, so 120=3Y, Y=40 and P=60. If AD becomes P=170−2Y with SRAS unchanged,150=3Y gives Y=50, P=70.
- If only SRAS instead becomes P=5+Y,135=3Y gives Y=45, P=50. If both changes occur,165=3Y gives Y=55, P=60. Output rises but the two price effects cancel in this specified example. That unchanged price result is not a universal rule for simultaneous outward shifts. P denotes a general price index and Y real national output, not one market’s money price and sales.
What is original equilibrium real output?
140−2Y=20+Y implies 3Y=120.
With both stated shifts, what is the new price index?
Y 55 gives P=5+55=60.
An AD/AS equilibrium necessarily occurs at potential output.
Equilibrium can lie below or temporarily above estimated sustainable capacity.
Test the limits
- The equations illustrate intersections; they are not estimates of an actual economy or a claim that AD is a physical law. Price/output adjustment, expectations, credit and capacity affect the real response. Short-run equilibrium below capacity can coexist with demand-deficient unemployment.
- Do not draw an AD shift to explain a movement caused only by the price level, or an AS shift merely because firms move along an unchanged schedule. Separate short-run cost changes from long-run capacity changes and state the reason for each curve’s movement before evaluating stakeholders.
Without shift magnitudes, what can normally be said of both outward AD and AS changes here?
Both support output, but AD and AS exert opposing price effects.
Apply and explain your answer
- Why is unchanged price level in the final case insufficient evidence that neither demand nor supply changed?
- Both curves changed, raising output; their opposing price-level effects cancel only under the stated magnitudes.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- equilibrium real output: Real national output consistent with planned aggregate demand and supply in the stated model.
- aggregate supply shift: A change in planned output at each general price level because a supply determinant changes.
Use fictional inverse schedules in index units: AD is P=140−2Y; SRAS is P=20+Y. Equilibrium requires 140−2Y=20+Y, so 120=3Y, Y=40 and P=60. If AD becomes P=170−2Y with SRAS unchanged,150=3Y gives Y=50, P=70. If only SRAS instead becomes P=5+Y,135=3Y gives Y=45, P=50. If both changes occur,165=3Y gives Y=55, P=60. Output rises but the two price effects cancel in this specified example. That unchanged price result is not a universal rule for simultaneous outward shifts. P denotes a general price index and Y real national output, not one market’s money price and sales.
The equations illustrate intersections; they are not estimates of an actual economy or a claim that AD is a physical law. Price/output adjustment, expectations, credit and capacity affect the real response. Short-run equilibrium below capacity can coexist with demand-deficient unemployment. Do not draw an AD shift to explain a movement caused only by the price level, or an AS shift merely because firms move along an unchanged schedule. Separate short-run cost changes from long-run capacity changes and state the reason for each curve’s movement before evaluating stakeholders.
Equilibrium real output in the AD/AS model is the output level at which planned aggregate spending and supply are consistent at the associated general price level. It need not be potential output or maximum employment. An AD shift changes equilibrium along unchanged supply; an aggregate supply shift changes equilibrium along unchanged demand.