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“What we re going to do in this video is talk about the notion of of equilibrium in a macroeconomics context. So let s review a little bit of what ve already studied about aggregate demand and aggregate supply. So this vertical axis here that is the price level for the economy. That we are trying to study.
And this horizontal axis right over here this would be the real gdp for that economy. The real gdp and now i could draw an aggregate demand curve in previous videos. We ve talked at length. Why economists like to model it as a downward sloping curve.
But once again take all of these things with a grain of salt. There s a lot of assumptions baked in and then i could also draw aggregate supply aggregate supply this would be short run aggregate supply upward sloping curve so i ll just call that short run aggregate supply and i ll call that short run aggregate supply one cause. We might look at other potential aggregate supply curves. I could also look at other potential aggregate demand curves.
But let s just do that for now so given these curves. What would be the price level and the level of output for this economy pause. This video and think about it well some of you all might just very naturally. Say well it would be the output and the price level that corresponds to this point of intersection and if you said that you would be correct.
So this would be our short run equilibrium output. Let me label that so that right over there is our short run equilibrium equilibrium equilibrium output corresponds to where the short run aggregate supply intersects to the aggregate demand curve and then this right over. Here. Would be our equilibrium price level.
Let s call that pl1. Now. Why do we feel good that this would be the short run equilibrium output. And this would be the price level well let s imagine what would happen if we were at a lower price level.
Let s say right over here at that price level..
We see that aggregate demand is outstripping. Aggregate supply the output that the aggregate demand wants is much higher than the output of the aggregate. The short run aggregate supply and so that would be a shortage situation. There s not enough output for all of that demand.
And what would likely happen in that situation well the folks producing that output would probably say hey i m gonna charge a little bit more for my output. And as they re charging more they ll say hey maybe i ll also produce a little bit more output. And they ll move up the curve towards that equilibrium point. And then on the demand side.
People would say hey i m not getting the output. I need i m willing to pay more for it. But as the cost of that output also goes up the demand. The output demanded would go down and we d end up back at that equilibrium point and we could do the same thought exercise.
If for some reason. We were at a price level above pl1 in this. Situation. Aggregate.
Supply short run. Aggregate supply is a good bit higher than aggregate. Demand. And so you have more output than what is being demanded and so what s likely to happen well the suppliers.
The people producing the output will say well i m gonna charge a little bit less for my output and produce less and then similarly those demanding will say hey there s this glut of output. I m gonna pay less for that output. But as they re able to pay less for it they ll say hey i want more and more of it and we get back to the equilibrium point. Now what we ve talked about so far is in the short run.
But some of you might be saying well what about the long run and in previous videos..
We have talked about long run aggregate supply and so. Let s say that this curve. Right over here. Represents.
The long run aggregate supply curve and where it intersects the horizontal axis this yf. You could view this as the output of this economy at full employment and it s really the sustainable output of this economy at full employment and so what s going on in the graph right over here our equilibrium output is well our short run equilibrium output is below our full employment output and so we have a gap. So there s a negative to go from our full employment output to our equilibrium output. And so if we wanted to think about this in the context of the business cycle.
Where would we be on it so let s draw the business cycle. So now i ll make the vertical axis the level of real output. So this would be real gdp right over here and then on the horizontal axis. This will be the passage of time that is time and so what typically so at any given point in time there will be a yf.
There will be some sustainable potential output for that economy and when i say sustainable it means you know people are sleeping properly resting properly you re not unsustainably depleting resources. And so for example at this point in time that might be the yf and that may be a few years. Later maybe. The population has grown there s more infrastructure technology s improved.
So now they can sustainably produce more and then a few years after that maybe they could produce even more population grows. They ve thought about better ways to arrange the resources in their economy. Technology. Improves and so you could imagine a world where that full employment output could just grow in a very nice way like this where it could just grow nicely like this.
But we know that s not the way real economies work they experience. The business cycle and the business cycle looks more like this so it will look more like this. Where you have your peaks and these troughs. A boom and bust cycle.
Sometimes people will talk about it and the parts of this curve..
Where you have increasing real gdp like there or there or there. We would call those expansions. So that is economic expansion and the parts. Where gdp is receding.
So for example right over here right over here we would call those recessions recessions. But let s go back to our aggregate demand and aggregate supply world right over here this equilibrium point y1. What point could that correspond to on this graph right over here of the business cycle and let me label that this is the business. The business cycle pause this video think about what point it could correspond to well we re at a point where a short run equilibrium output is below our full employment output our potential output our sustainable full potential output.
So this would correspond to some point. Where our real gdp is sitting below this blue curve or this blue line. The way. I ve drawn it and so y1 could for example be this point or it could be that point or it could be that point and so if it was this one right over here then that right over there would be y1 and this right over.
Here would be the yf would be the yf for this point in time now as we go forward in time this yf. We see this economic growth. It could move to the right as population grows as we have better technology et cetera et cetera et. Cetera.
But you re probably thinking well what about other points are there other possible scenarios and my answer to you would be absolutely so you could imagine a world where the equilibrium output is to the right of our potential output and i will construct that by making a different short run aggregate supply curve. Although. I could also do that by shifting the aggregate demand curve and we ll do that in future videos. But imagine a situation like this imagine so i ll call this short run aggregate supply two and now this is our equilibrium equilibrium output y2 and it corresponds to price level price level two right over here and notice here there s a gap.
But it s a positive gap. Our actual output is above our sustainable output and so for example this could correspond to maybe this point. If it does correspond to this point so if this was y2 then this would be our current yf. I didn t actually shift it.
But hopefully you re getting the general idea and you re saying well how can you produce beyond full employment..
How can you produce beyond your sustainable potential well. This is an economy. That is producing output in an unsustainable way unemployment is unusually low you have maybe depleting resources. People are working too hard.
They re getting stressed out they re not sleeping properly. However you wanna think about it. It s not considered sustainable and then you have a third scenario. Where your short run equilibrium output.
Actually equals your full employment output. And so that could be this scenario right over. Here. So this would be our short run aggregate supply three and notice over here.
Our equilibrium output. Y3 is equal to our full employment output. And when this happens. This is considered a long run equilibrium so let me write that down that is considered a long run equilibrium equilibrium and points that correspond to long run equilibria on this business cycle right over.
Here would be this point right over there. And that point and that point and that point so i ll leave you there in future videos. We will actually think about how aggregate demand and short run aggregate supply will shift and connect it even further to the cycles in the business cycle. ” .
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The interaction of SRAS and AD determine national income. We can compare that national income to the full employment national income to determine the current phase of the business cycle. An economy is said to be in long-run equilibrium if the short-run equilibrium output is equal to the full employment output. AP(R) Macroeconomics on Khan Academy: Macroeconomics is all about how an entire nation s performance is determined and improved over time. Learn how factors like unemployment, inflation, interest rates, economic growth and recession are caused and how they affect individuals and society as a whole. We hit the traditional topics from an AP Macroeconomics course, including basic economic concepts, economic indicators, and the business cycle, national income and price determination, the financial sector, the long-run consequences of stabilization policies, and international trade and finance. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We ve also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything https://www.youtube.com/subscription_center?add_user=khanacademy.
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education, online learning, learning, lessons, AP Macroeconomics, Macroeconomics, SRAS, AD, LRAS, Short-run macroeconomic equilibrium, Natinal income determi…