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Short-Run & Long-Run Macroeconomic Equilibrium | UPSC Notes

Short run, equilibrium happens when:What people want to buy = What businesses want to produce, at the current price level.
Amith

Short-Run Macroeconomic Equilibrium & & Long-Run Macroeconomic Equilibrium

🌍 What is Short-Run Macroeconomic Equilibrium?

It is a situation where:

  • What people want to buy (Aggregate Demand, or AD)

  • Is equal to what businesses want to produce (Short-Run Aggregate Supply, or SRAS)

  • At the current price level

👉 When this happens, the economy is balanced—no need to increase or decrease prices or production.

🍎 Easy Example (Market for Apples)

Imagine a town where:

  • People want to buy 100 apples a day (this is the AD)

  • Apple farmers can produce exactly 100 apples a day (this is the SRAS)

  • Apples are being sold at ₹10 per apple (this is the price level)

✅ At this point:

  • All the apples produced are sold.

  • Buyers are happy (they get the apples they want).

  • Farmers are happy (they sell all their apples at a good price).

  • No one wants to change the price or the number of apples.

🎯 This is short-run macroeconomic equilibrium!

🤔 What if something changes?

🔺 If demand increases:

  • People now want 120 apples, but supply is still 100.

  • Result: Shortage → prices may go up.

🔻 If demand falls:

  • People want only 80 apples, but 100 are produced.

  • Result: Surplus → prices may fall.

Until prices or output adjust, we are not in equilibrium.

💡 Summary:

In the short run, equilibrium happens when:

What people want to buy = What businesses want to produce,
at the current price level, so there’s no pressure to change anything.

📘 What is Long-Run Macroeconomic Equilibrium?

In the long run, the economy settles at a point where:

  • Aggregate Demand (AD) = Long-Run Aggregate Supply (LRAS)

  • The LRAS curve is vertical, meaning the economy is producing at its full employment level of output (i.e., using all resources efficiently).

  • This means everyone who wants to work at the normal wage rate has a job, and factories, machines, and land are fully used.

🧃 Easy Example: Juice Factory

Imagine:

  • A juice factory can make a maximum of 1,000 bottles a day when all workers and machines are fully used. This is its full capacity – like the LRAS.

  • People in the town are demanding exactly 1,000 bottles a day – this is the AD.

✅ The juice factory is:

  • Producing at full capacity

  • Selling everything it makes

  • Not increasing or reducing production

🎯 This is Long-Run Macroeconomic Equilibrium – everything is running at the best possible level.

🔁 What if we’re not in long-run equilibrium?

Case 1: Too little demand (Recessionary gap)

  • People want only 800 bottles

  • Factory is underused

  • Some workers are jobless

⬆ Over time: Wages may fall → Production costs fall → Output increases → Back to 1,000 bottles

Case 2: Too much demand (Inflationary gap)

  • People want 1,200 bottles

  • Factory overworks → overtime, stress, higher wages

  • Prices rise (inflation)

⬇ Over time: Prices rise → Demand falls → Back to 1,000 bottles

👉 In both cases, the economy naturally adjusts back to full employment.

💡 Summary:

  • Long-run equilibrium happens where AD = LRAS

  • The economy is at full employment output

  • No inflationary or recessionary gap

  • The economy self-adjusts to this point over time

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