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INCREASING-COST INDUSTRY: A perfectly competitive industry with a positively-sloped long-run industry supply curve that results because expansion of the industry causes higher production cost and resource prices. For an increasing-cost industry the entry of new firms, prompted by an increase in demand, causes the long-run average supply curve of each firm to shift upward, which increases the minimum efficient scale of production.

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Lesson 16: Aggregate Shocks | Unit 3: Basic Shifts Page: 9 of 21

Topic: AD Decrease: Long Run <=PAGE BACK | PAGE NEXT=>

The long-run equilibrium is given by the intersection of the negatively-sloped AD curve and the vertical LRAS.
  • A decrease in AD results in a new long-run equilibrium.
  • At the new equilibrium, real production does not change, it stays at Qf. The price level decreases from Po to P2.
  • We're still missing a lot of short-run action that occurs as we go from one long-run equilibrium to another.

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AGGREGATE MARKET SHOCKS

Disruptions of the equilibrium in the aggregate market (or AS-AD model) caused by shifts of the aggregate demand, short-run aggregate supply, or long-run aggregate supply curves. Shocks of the aggregate market are associated with, and thus used to analyze, assorted macroeconomic phenomena such as business cycles, unemployment, inflation, stabilization policies, and economic growth. The specific analysis of aggregate market shocks identifies changes in the price level (GDP price deflator) and real production (real GDP). Changes in the price level and real production have direct implications for the unemployment rate, the inflation rate, national income, and a host of other macroeconomic measures.

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