PERFECT COMPETITION, LOSS MINIMIZATION: A perfectly competitive firm is presumed to produce the quantity of output that minimizes economic losses, if price is greater than average variable cost but less than average total cost. This is one of three short-run production alternatives facing a firm. The other two are profit maximization (if price exceeds average total cost) and shutdown (if price is less than average variable cost).
Visit the GLOSS*arama
DISEQUILIBRIUM, AGGREGATE MARKET:
The state of the aggregate market in which real aggregate expenditures are NOT equal to real production, which results in an imbalance that induces a change in the price level, aggregate expenditures, and/or real production. In other words, the opposing forces of aggregate demand (the buyers) and 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 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, while resource markets are not (at least in the short run).
Working a Graph
The standard graphical representation of the 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 three curves. The negatively-sloped aggregate demand curve is labeled AD. The positively-sloped short-run aggregate supply curve is labeled SRAS. The vertical long-run aggregate supply curve is labeled LRAS. For reference, equilibrium is indicated by the intersection of the three curves at price level 10.
|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 LongAggregate market 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 EquilibriumThe basic adjustment mechanism that restores equilibrium in the aggregate market is essentially the same as that for the standard market model. Imbalances between aggregate demand and aggregate supply induce changes in the price level that ultimately achieve equilibrium.
In both cases, the price level moves toward the equilibrium price level. Moreover, the gap between aggregate expenditures and real production is closed.
- 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.
DISEQUILIBRIUM, AGGREGATE MARKET, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 3, 2024].
Check Out These Related Terms...
| | | | | | | | | |
Or For A Little Background...
| | | | | | | | | | | | | | |
And For Further Study...
| | | | | | | | |
Back to the WEB*pedia
Today, you are likely to spend a great deal of time looking for the new strip mall out on the highway looking to buy either a genuine down-filled comforter or a 200-foot blue garden hose. Be on the lookout for broken fingernail clippers.
Your Complete Scope
This isn't me! What am I?
The average length of a "business lunch" is about 36 minutes.
"I think luck is the sense to recognize an opportunity and the ability to take advantage of it . The man who can smile at his breaks and grabs his chance gets on."
-- Samuel Goldwyn, Film executive
Regional Check Processing Center
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.