Aggregate Demand and Aggregate Supply Review

7.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run

Key Takeaways

  • The short run in macroeconomics is a period in which wages and some other prices are sticky. The long run is a period in which full wage and price flexibility, and market adjustment, has been achieved, so that the economy is at the natural level of employment and potential output.
  • The long-run aggregate supply curve is a vertical line at the potential level of output. The intersection of the economy's aggregate demand and long-run aggregate supply curves determines its equilibrium real GDP and price level in the long run.
  • The short-run aggregate supply curve is an upward-sloping curve that shows the quantity of total output that will be produced at each price level in the short run. Wage and price stickiness account for the short-run aggregate supply curve's upward slope.
  • Changes in prices of factors of production shift the short-run aggregate supply curve. In addition, changes in the capital stock, the stock of natural resources, and the level of technology can also cause the short-run aggregate supply curve to shift.
  • In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of the aggregate demand and the short-run aggregate supply curves. In the short run, output can be either below or above potential output.