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AGGREGATE MARKET EQUILIBRIUM: The state of equilibrium that exists in the aggregate market when real aggregate expenditures are equal to real production with no imbalances to induce changes in the price level or real production. In other words, the opposing forces of aggregate demand (the buyers) and aggregate supply (the sellers) exactly offset each other. The four macroeconomic sector (household, business, government, and foreign) buyers purchase all of the real production that they seek at the existing price level and business-sector producers sell all of the real production that they have at the existing price level. The aggregate market equilibrium actually comes in two forms: (1) long-run equilibrium, in which all three aggregated markets (product, financial, and resource) are in equilibrium and (2) short-run equilibrium, in which the product and financial markets are in equilibrium, but the resource markets are not.
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                           ENERGY PRICES, AGGREGATE SUPPLY DETERMINANT: One of several specific aggregate supply determinants assumed constant when the aggregate supply curve is constructed, and that shifts the aggregate supply curve when it changes. An increase in the energy prices causes a decrease (leftward shift) of the aggregate supply curve. A decrease in the energy prices causes an increase (rightward shift) of the aggregate supply curve. Other notable aggregate supply determinants include technology, wages, and the capital stock. Energy prices fall under the resource price aggregate supply determinant. Energy prices, especially petroleum or oil prices, tend to be an important component of the total cost of producing the economy's aggregate supply of real production. Energy is perhaps second only to labor as a pervasive component of aggregate production. Virtually every good or service produced in the economy requires some degree of energy input, especially petroleum. Energy is extremely important in the transportation of commodities. However, many products also use petroleum as a raw material.While small changes in energy prices are not likely to have a discernible affect on aggregate supply, the pervasive importance of energy means that moderately large changes DO cause changes in aggregate supply. In particular, higher energy prices increase the overall cost of production and cause a decrease in aggregate supply. Lower energy prices decrease the overall cost of production and cause an increase in aggregate supply. This means that changes in energy prices affect the ability of the business sector to produce and supply real production in the short run. | Shifting the SRAS Curve |  |
Consider a representative short-run aggregate supply curve such as the one displayed in the exhibit to the right. Like all short-run aggregate supply curves, this one is constructed based on several ceteris paribus aggregate supply determinants, such as energy prices. The key question is: What happens to the short-run aggregate supply curve if energy prices change? Make note that energy prices are not a determinant of long-run aggregate supply. As such there is no need to consider shifts of the LRAS curve.Lower Energy PricesSuppose, for example, that energy prices fall by two-thirds, much like they did during the early 1980s. This decline in energy prices reduces production cost and leads to an increase in short-run aggregate supply, causing the SRAS curve to shift rightward. Note that the decline in energy prices and production cost make it possible to supply the same quantity of real production at a lower price level or to supply a larger quantity of real production at the same price level, either of which means an increase in aggregate supply.To see how lower energy prices affect the aggregate supply curve, click the [Lower Energy Prices] button. The lower energy prices trigger an increase in short-run aggregate supply and a rightward shift of the short-run aggregate supply curve. Higher Energy PricesAlternatively, suppose that energy prices triple, much like they did during the 1970s. This increase in energy prices reduces production cost and leads to a decrease in short-run aggregate supply, causing the SRAS curve to shift leftward. Note again that the increase in energy prices and production cost mean the same quantity of real production is supplied at a higher price level or a larger quantity of real production is supplied at the same price level, either of which means a decrease in aggregate supply.To see how higher energy prices affect the aggregate supply curve, click the [Higher Energy Prices] button. The higher energy prices trigger a decrease in short-run aggregate supply and a leftward shift of the short-run aggregate supply curve. What Does It Mean?The importance of energy prices as an aggregate supply determinant is most important for what it means to the theoretical development of the aggregate market analysis. From the Great Depression of the 1930s to the start of the 1970s, economists and economic theory largely ignored the supply-side of the economy. The focus was on the demand-side, which had been well-documented as the source of business-cycle instability.However, during the first half of the 1970s, petroleum prices tripled. They tripled again near the end of the decade. These price increases contributed to the stagflation that characterized this decade. They also prompted economists to re-evaluate the exclusive focus on demand with the realization that the economy can also be disrupted from the supply-side. The result of this re-evaluation was the development of the aggregate market, or AS-AD, analysis, which is a powerful and generalized model of the macroeconomy.
Recommended Citation:ENERGY PRICES, AGGREGATE SUPPLY DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: April 13, 2021].
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Today, you are likely to spend a great deal of time touring the new suburban shopping complex hoping to buy either a coffee table shaped like the state of Florida or storage boxes for your summer clothes. Be on the lookout for deranged pelicans.
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The penny is the only coin minted by the U.S. government in which the "face" on the head looks to the right. All others face left.
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LCH
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