How can you tell if the short run equilibrium is also the long run equilbrium?
To determine if the short-run equilibrium is also the long-run equilibrium, you need to consider the presence of any changes that affect the economy over time. Here are the steps to analyze whether the short-run equilibrium is also the long-run equilibrium:
1. Understand the concepts:
- Short-run equilibrium: This refers to the point where the aggregate demand (AD) curve intersects the short-run aggregate supply (SRAS) curve, determining the output level and price level in the short run.
- Long-run equilibrium: This is the point where the aggregate demand (AD) curve intersects the long-run aggregate supply (LRAS) curve, representing the full potential output level and a stable price level in the long run.
2. Analyze the factors that affect the long-run equilibrium:
- Changes in resource availability: If there are changes in resources, such as advancements in technology, increases in labor force, or improvements in infrastructure, it can shift the long-run aggregate supply (LRAS) curve.
- Changes in consumer preferences: Shifts in consumer preferences can influence the aggregate demand (AD) curve, affecting the long-run equilibrium.
- Government policies: Alterations in fiscal or monetary policies can also shift the aggregate demand (AD) curve, affecting the long-run equilibrium.
3. Consider the time horizon:
- Short run: In the short run, prices might not adjust fully to changes in demand or supply. Wages and prices may be rigid, causing a disparity between aggregate demand and aggregate supply and resulting in a temporary equilibrium.
- Long run: In the long run, wages and prices are more flexible. Any changes in factors affecting the economy will lead to adjustments in wages and prices, shifting the aggregate supply and demand curves until they reach a new long-run equilibrium.
4. Evaluate if the short-run equilibrium is also the long-run equilibrium:
- If there are no factors that affect the economy in the long run (e.g., constant resources, stable consumer preferences, and unchanging government policies), the short-run equilibrium will be the same as the long-run equilibrium.
- However, if there are changes in resource availability, consumer preferences, or government policies, the short-run equilibrium will differ from the long-run equilibrium.
By analyzing these factors, you can determine whether the short-run equilibrium will eventually converge to the long-run equilibrium or whether there are factors that will cause the two equilibria to diverge.