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FORECASTING: The process of anticipating and predicting economic conditions months or years before fact using statistical estimation techniques the model economic activity. Forecasting most often employs sophisticated mathematical models (with hundreds equations). However, specific measures (such as the stock market) or composite indexes that have been shown to lead economic activity (that is, leading economic indicator) are also effectively used for forecasting.

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Lesson 7: Market Equilibrium | Unit 4: Adjustment Page: 13 of 22

Topic: Self-Correction <=PAGE BACK | PAGE NEXT=>

Markets have a built-in self correction mechanism:
  • If a market is at equilibrium, it remains there.
  • If a market is not at equilibrium, it moves to equilibrium.
  • A market does not need someone (like government) controlling it to ensure that it reaches equilibrium.
Three price alternatives:
  • At equilibrium, nothing changes.
  • Below equilibrium, a shortage.
  • Above equilibrium, a surplus.
  • By creating shortages and surpluses, non-equilibrium prices induce the price to change. These changing prices move the market back to equilibrium.

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AGGREGATE SUPPLY

The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply, usually abbreviated AS, is two different relations between price level and real production--long run and short run. With long-run aggregate supply, prices and wages are flexible and all markets are in equilibrium. With short-run aggregate supply some prices and wage are NOT flexible and some markets are NOT in equilibrium. This is one half of the AS-AD (aggregate market) analysis. The other half is aggregate demand.

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