Working a Graph

Aggregate Market Disequilibrium

Disequilibrium in the aggregate market results at price levels that do not correspond to intersections of the AD curve and either the LRAS curve or 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 aggregate market results if the price level has a value of 11. This price level does not correspond to the intersection of the three curves. In particular, aggregate demand is less than both long-run and short-run aggregate supply, meaning aggregate expenditures are less than real production. Whether the time frame is short run or long run, 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 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 three curves. In this case, aggregate demand is greater than both long-run and short-run aggregate supply, meaning aggregate expenditures are greater than real production. Whether the time frame is short run or long run, buyers are unable to buy all of the real production they seek. The result is economy-wide product market shortages.

Short and Long

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

• A price level that is too high, such as a value of 11 in this exhibit, will fall. The lower price level induces an increase in aggregate expenditures and a short-run decrease in real production.


• A price level that is too low, such as a value of 9 in this exhibit, will rise. The higher price level induces a decrease in aggregate expenditures and a short-run increase in real production.