equilibrium in the short run is established when aggregate demand intersects
with short-run aggregate supply. This is shown in the diagram below
level P, aggregate demand for goods and services is equal to the aggregate
supply of output. The output and the general price level in the economy will
tend to adjust towards this equilibrium position. If the price level is too
high, there will be an excess supply of output. If the price level is below
equilibrium, there will be excess demand in the short run.
A Shift In Aggregate Supply
that increased efficiency and productivity together with lower input costs
causes the short run aggregate supply curve to shift outwards. (Assume no
shift in aggregate demand).
below shows what is likely to happen. AS shifts outwards and a new
macroeconomic equilibrium will be established. The price level has fallen and
real national output (in equilibrium) has increased to Y2.
supply would shift inwards if there is a rise in the unit costs of production
in the economy. For example there might be a rise in unit wage costs perhaps
caused by higher wages not compensated for by higher labour productivity.
economic shocks might also cause the aggregate supply curve to shift inwards.
For example a sharp rise in global commodity prices. If AS shifts to the
left, assuming no change in the aggregate demand curve, we expect to see a
higher price level (this is known as cost-push inflation) and a lower level
of real national output.
A Shift In Aggregate Demand
diagram below we see the effects on an inward shift in aggregate demand in
the economy. This might be caused for example by a decline in business
confidence (reducing planned investment demand) or a fall in exports
following a global downturn. It might also be caused by a cut in government
spending or a rise in interest rates.
of the inward shift of AD is a contraction along the short run aggregate
supply curve and a fall in the real level of national output (i.e. a
recession). This causes downward pressure on the general price level.
aggregate demand shifts outwards (perhaps due to increased business
confidence, an economic upturn in another country, or higher levels of
government spending), we expect to see both a rise in the price level and
higher national output.
Notes on the Internet
Aggregate Demand and Supply Analysis. A PowerPoint presentation
Aggregate Demand and Supply Analysis. A Review
Aggregate Demand and Supply Analysis. Key Facts
Aggregate Demand and Supply Analysis. Glossary of Terms
Extended Aggregate Demand and Supply Analysis. A PowerPoint presentation
Extended Aggregate Demand and Supply Analysis. A Review
Extended Aggregate Demand and Supply Analysis. Key Facts
Extended Aggregate Demand and Supply Analysis. Glossary of Terms
AS/A D Analysis
Aggregate Demand and Supply Analysis. Multiple Choice
Aggregate Demand and Supply Analysis. Questions
Aggregate Demand and Supply Analysis. Internet Data Questions
Extended Aggregate Demand and Supply Analysis. Questions
Extended Aggregate Demand and Supply Analysis. Multiple Choice
Extended Aggregate Demand and Supply Analysis. Internet Data Questions
Government Spending. A PowerPoint presentation
Government Spending. A Review
Government Spending. Key Facts
Government Spending. Glossary of Terms
Government Spending. Questions
Government Spending. Multiple Choice
Government Spending. Internet Data Questions
A Breakdown of Public Expenditure by Sector
This information is included in the National Accounts for 1996
Information dating back to 1979
Public Sector Borrowing Requirement
Information dating back to 1979