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HOMOGENEOUS PRODUCT: Goods that are either physically identical or at least viewed as identical by buyers. In particular, the producer of a product can not be identified from the product itself. This is a key assumption underlying the perfect competition market structure, and like other assumptions is only approximated in the real world. Agricultural products, metals, and energy goods come as close as any in the real world.

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DISEQUILIBRIUM, SHORT-RUN AGGREGATE MARKET:

The state of the short-run aggregate market in which aggregate expenditures are NOT equal to real production, which result in imbalances that induce changes in the price level, aggregate expenditures, and real production. In other words, the opposing forces of aggregate demand (the buyers) and short-run aggregate supply (the sellers) are out of balance. At the existing price level, either the four macroeconomic sectors (household, business, government, and foreign) are unable to purchase all of the real production that they seek or producers are unable to sell all of the real production that they have.
Disequilibrium in the short-run aggregate market, strictly speaking, means that an imbalance exists between demand and supply in the aggregate product markets. It does not necessarily mean that imbalances exist in the other two aggregated markets--financial and resource. In fact, the relative speed of adjustment for the three markets suggests that financial markets are likely to be in equilibrium. And because this is the short-run aggregate market, resource markets are not likely to be in equilibrium.

Working a Graph

Disequilibrium
Short-Run Aggregate Market
Disequilibrium

The standard graphical representation of the short-run aggregate market is presented in the exhibit to the right. The vertical axis measures the price level (GDP price deflator) and the horizontal axis measures real production (real GDP). This graph includes two curves. The negatively-sloped aggregate demand curve is labeled AD. The positively-sloped short-run aggregate supply curve is labeled SRAS. For reference, equilibrium is indicated by the intersection of the two curves at price level 10.

Disequilibrium in the short-run aggregate market results at price levels that do not correspond to intersection of the AD curve and the SRAS curve. Consider two alternatives to illustrate:

  • Higher Price Level: Suppose that the price level is above the equilibrium value of 10. Such a price level can be displayed by clicking the [Higher Price Level] button. Disequilibrium in the short-run aggregate market results if the price level has a value of 11. This price level does not correspond to the intersection of the two curves. In particular, aggregate demand is less than short-run aggregate supply, meaning aggregate expenditures are less than real production. Producers are unable to sell all of their real production. The result is economy-wide product market surpluses.

  • Lower Price Level: Suppose that the price level is below the equilibrium value of 10. This particular price level can be displayed by clicking the [Lower Price Level] button. Disequilibrium in the short-run aggregate market also results if the price level has a value of 9. This price level also fails to correspond to the intersection of the two curves. In this case, aggregate demand is greater than short-run aggregate supply, meaning aggregate expenditures are greater than real production. Buyers are unable to buy all of the real production they seek. The result is economy-wide product market shortages.

Short and Long

Disequilibrium can arise in both the long-run aggregate market and the short-run aggregate market. However, disequilibrium in one time frame does not necessarily mean disequilibrium in the other.

In particular, disequilibrium in the long-run aggregate market does not necessarily mean disequilibrium in the short-run aggregate market. That is, a given price level might correspond to the intersection of the aggregate demand curve and the short-run aggregate supply curve, but not the intersection of the aggregate demand curve and the long-run aggregate supply curve. This is, in fact, the essence of short-run equilibrium--aggregate expenditures match short-run real production, but NOT long-run, full-employment real production.

In contrast, disequilibrium in the short-run aggregate market does necessarily mean disequilibrium in the long-run aggregate market. If aggregate expenditures do not match real production, then they fail to match real production generated in the short-run as well as that generated in the long run at full employment.

Adjustment to Equilibrium

The basic adjustment mechanism that restores equilibrium in the short-run aggregate market is essentially the same as that for the standard market model. Imbalances between aggregate demand and short-run aggregate supply induce changes in the price level that ultimately achieve equilibrium.

A key feature of this adjustment process for the short run is that price level changes induce changes in both aggregate expenditures and real production. The reason for changes in real production lies with short-run price rigidity, especially resource prices. Rigid resource prices mean resource owners respond to price level changes with changes in productive effort and thus changes in real production. As such, changes in the price level can induce changes in short-run aggregate supply, making it greater or less than full-employment real production.

  • Suppose, for example, that the price level happens to be above the equilibrium, such as a value of 11. Aggregate expenditures fall-short of real production causing economy-wide product market surpluses. These surpluses trigger lower product prices, again economy-wide, which result in a decline in the price level. This adjustment continues until the price level once again reaches the equilibrium value of 10. As the price level falls aggregate expenditures increase and real production declines until product market surpluses are eliminated.

  • Now suppose that the price level is below the equilibrium, such as a value of 9. Aggregate expenditures exceed full employment real production causing economy-wide product market shortages. These shortages trigger higher product prices, again economy-wide, which result in a rise in the price level. This adjustment continues until the price level once again reaches the equilibrium value of 10. As the price level rises aggregate expenditures decrease and real production rises until product market shortages are eliminated.
In both cases, the price level moves toward the equilibrium price level. And when it does aggregate expenditures and real production change to eliminate economy-wide product market imbalances.

<= DISEQUILIBRIUM PRICEDISINFLATION =>


Recommended Citation:

DISEQUILIBRIUM, SHORT-RUN AGGREGATE MARKET, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 20, 2018].


Check Out These Related Terms...

     | short-run aggregate market | equilibrium, short-run aggregate market | aggregate market | disequilibrium, aggregate market | disequilibrium, short-run aggregate market | equilibrium, aggregate market | aggregate market analysis | short-run aggregate market | equilibrium, short-run aggregate market |


Or For A Little Background...

     | aggregate demand | aggregate supply | aggregate expenditures | macroeconomic sectors | macroeconomic markets | short-run aggregate supply | aggregate demand curve | short-run aggregate supply curve | price level | GDP price deflator | real gross domestic product | equilibrium | full employment |


And For Further Study...

     | output gaps | recessionary gap | inflationary gap | aggregate market shocks | self correction, aggregate market | Keynesian economics | monetary economics | classical economics |


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