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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

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Lesson 14: Production | Unit 1: Short-Run Production Page: 5 of 25

Topic: Unit Review <=PAGE BACK | PAGE NEXT=>

In this unit, you should have learned about:
  • Production as the transformation of inputs into outputs an the central role it plays in market supply.
  • The difference between fixed inputs, which can not be changed during the period of analysis, and variable inputs, which can be changed.
  • Why the standard view is capital as the fixed input and labor as the variable input.
  • How fixed and variable inputs are related to the short run and long run.
  • Why firms are considered to operate in the short run and long run simultaneously.
  • Two alternative production time periods -- market period, in which all inputs and the output is fixed, and very long run, in which all inputs including social institutions and technology beyond the control of the firm are variable.


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TOTAL REVENUE CURVE, PERFECT COMPETITION

A curve that graphically represents the relation between the total revenue received by a perfectly competitive firm for selling its output and the quantity of output sold. It is combined with a perfectly competitive firm's total cost curve to determine economic profit and the profit maximizing level of production. The slope of the total revenue curve is marginal revenue.

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