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

Equilibrium in the Long Run

Alright. So now let's put together everything we've learned about aggregate demand and aggregate supply to find equilibrium in the long run and the short run, so this is what the A. D. A. S. Model is coming to we're looking for the equilibrium amount of GDP and price level in the economy. Okay. So the long run equilibrium is going to be where the aggregate demand, short run aggregate supply and long run aggregate supply all intersect together. Ok, So remember in the market supply curve we were drawing some shape like this, right? We had our our graph and we were looking for a shape that looks like this and this this middle point was our equilibrium right right in the middle of of the X. Of the demand and supply. Well when we're doing the long run equilibrium with the aggregate demand, aggregate supply, we've got three curves we're dealing with here, we've got our aggregate demand are short run aggregate supply and long run aggregate supply. So our curve our our graph is gonna look more like this, we're gonna have the X. From before this is our aggregate demand, aggregate supply and then our long run aggregate supply. So we're gonna have this star shape and we're all three of the mix right there in the middle. Well that is going to be our long run equilibrium. So let's draw that here on the big graph. So our aggregate demand in the long run our our equilibrium in the A. D. A. S. Model. So remember we've got our price level on this side of the graph, the Y axis. we've got a real GDP the amount of production in the economy there on our X axis. So as we saw we had our aggregate demand curve was downward sloping like this and that's aggregate demand. And then we had short run aggregate supply going up like this and then we had our long run aggregate supply. So when we're in long run equilibrium, all three of the curves are going to pass through the same point, just like that and we're going to have our equilibrium right here in the middle. Yeah. And this will be our equally equilibrium price level right here and this will be the equilibrium amount of GDP right here. Okay, so the long run equilibrium is where all three of the curves across each other. Now let's talk about the short run equilibrium in the

Equilibrium in the Short Run

well in the short run, it's possible that we're not in long run equilibrium, we might be in the long run equilibrium, but we might not. So what we might see is we might have had some sort of situation like this where we had our aggregate demand and I'm gonna say aggregate demand one, we're gonna have our aggregate supply, short run aggregate supply and then we'll have our long run aggregate supply going straight up. And let's say in the short run, something has caused aggregate demand to shift. Right, So aggregate demand may have shifted to the left, let's say aggregate demand shifted to the left. In the short run, we might not be in the long run equilibrium. Well, our short run equilibrium is where our aggregate demand meets with our short run aggregate supply. Right? When we're thinking about the short run, we gotta think about the short run equilibrium with aggregate demand. Remember there's no short run and long run aggregate demand, there's just one aggregate demand and our short run aggregate supply. So that would be this point right here, would be our short run equilibrium right here, I'm gonna write it in short run equilibrium. Okay, right. At that point where the short run aggregate supply is touching the shifted aggregate demand curve. Right? So that could have been any of those curves could have shifted our short run aggregate supply, our aggregate demand, anything could have shifted leading to some other short run equilibrium. Other than our long run equilibrium. Right? So this would be our short run equilibrium right here, as far as the price level goes, would be right here price level. And I'll say in the short run and GDP in the short run, right, so it would have shifted and we would have had this different short run equilibrium. Alright, so there's a lot of, a lot of different lines going on there. So what I like to do is I like to keep our original situation in all one color just like this and draw our new curves in a different color, like I did with the red aggregate demand curve, it makes it a lot easier to see where our which curve was there originally and which is the new curve. Cool. So our short run equilibrium, the main takeaway here is that it's not necessarily at the long run equilibrium where the three curves touched their. Cool. Alright, let's go ahead and pause and let's talk a little bit more about these shifts. And what happens in short run equal