Equilibrium in the AD-AS Model
Economics: IB Diploma, topic 2.2.8
Equilibrium in the AD-AS Model
We can use diagrams of AD and AS curves to find the equilibrium in an economy.
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Using AD/AS to show short-run equilibrium
- The intersection of the SRAS and aggregate demand curves shows the short-run equilibrium level of real GDP and the equilibrium price level in the economy.
- At a relatively low price level for output, firms have little incentive to produce, although consumers would be willing to purchase a large quantity of output.
- As the price level rises, aggregate supply rises and aggregate demand falls until the equilibrium point is reached.
Using AD/AS to show long-run equilibrium
- Long-run equilibrium occurs when the AD and SRAS curves intersect on the LRAS—i.e., at the full-employment level of real output.
Equilibrium
- Equilibrium means balance.
- AD and AS are always dynamic, but they should naturally meet at an equilibrium point.
Test yourself on Equilibrium in the AD-AS Model
What shows the equilibrium price level and real national output of the economy?