Equilibrium and Changes in Equilibrium

⚖️ Equilibrium and Changes in Equilibrium

(in the context of Aggregate Demand and Aggregate Supply in Macroeconomics)

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🧠 1. What is Macroeconomic Equilibrium?

In macroeconomics, equilibrium occurs when Aggregate Demand (AD) equals Aggregate Supply (AS).

✅ Definition:

Macroeconomic equilibrium is the point where the total quantity of goods and services demanded equals the total quantity of goods and services supplied in the economy at a particular price level.

It determines:

• The equilibrium price level (overall price level in the economy)
• The equilibrium real GDP (actual output or national income)

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🪙 Graphical Representation

• Vertical axis: Price level
• Horizontal axis: Real GDP (output)
• AD curve: Downward sloping (as price level ↓, demand ↑)
• SRAS curve: Upward sloping (as price level ↑, supply ↑)

The point where AD intersects SRAS is the short-run equilibrium.

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📈 2. Short-Run vs Long-Run Equilibrium

🔹 Short-Run Equilibrium

• Occurs where AD intersects SRAS.
• The economy may not be at full employment.
• Can result in recessionary gap or inflationary gap.

🔹 Long-Run Equilibrium

• Occurs where AD = SRAS = LRAS.
• The economy is producing at full employment output (potential GDP).
• No output gap (unemployment is at the natural rate).

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🔁 3. Changes in Equilibrium

When AD or AS shifts, the equilibrium output and price level also change.

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🟢 A. Change in Aggregate Demand (AD)

✅ AD Increases (shifts right):

• Equilibrium price level rises (inflation)
• Equilibrium real GDP increases
• Unemployment ↓
• Risk of demand-pull inflation

❌ AD Decreases (shifts left):

• Equilibrium price level falls
• Equilibrium real GDP falls
• Unemployment ↑
• Risk of recession

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🔵 B. Change in Short-Run Aggregate Supply (SRAS)

✅ SRAS Increases (shifts right):

• Price level falls
• Real GDP rises
• Unemployment ↓
• Usually due to improved productivity or lower input costs

❌ SRAS Decreases (shifts left):

• Price level rises (cost-push inflation)
• Real GDP falls
• Unemployment ↑
• Often caused by negative supply shocks (e.g., oil price spike)

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🟡 C. Change in Long-Run Aggregate Supply (LRAS)

✅ LRAS Increases (shifts right):

• Economic growth
• Higher potential GDP
• Long-run output increases without increasing inflation

❌ LRAS Decreases (shifts left):

• Decline in productive capacity
• May be caused by war, natural disasters, or loss of labor force

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📊 Summary Table

Change	Price Level	Output (Real GDP)	Unemployment
↑ AD	↑	↑	↓
↓ AD	↓	↓	↑
↑ SRAS	↓	↑	↓
↓ SRAS	↑	↓	↑
↑ LRAS	No change (long-run)	↑	↓ (in long term)

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💡 Real-World Example

🦠 COVID-19 Pandemic (2020):

• AD dropped sharply due to lockdowns and fear → ↓ GDP, ↑ unemployment
• Governments increased spending and central banks lowered interest rates to boost AD → equilibrium slowly restored

🛢️ Oil Price Shock (1970s):

• SRAS decreased due to higher input costs → stagflation (↓ GDP, ↑ inflation, ↑ unemployment)

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✅ Key Takeaways

• Equilibrium occurs where AD = AS.
• Changes in AD or AS shift the equilibrium output and price level.
• Short-run equilibrium may differ from full employment.
• Policy tools (fiscal and monetary) aim to restore or maintain equilibrium.

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