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MARGINAL-COST PRICING: A pricing scheme in which the price received by a firm is set equal to the marginal cost of production. This is not only the efficient outcome achieved by competitive markets, it is commonly used for comparison of other regulatory policies, such as average-cost pricing, that are used for public utilities (especially those that are natural monopolies). The bad thing about marginal-cost pricing for natural monopolies is that a normal profit is not guaranteed. The good thing about marginal-cost pricing is that marginal cost is equal to price, and the public utility is operating according to the price equals marginal cost (P = MC) rule of efficiency.

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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

Aggregate Market Disequilibrium
Disequilibrium

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.

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

Aggregate 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 Equilibrium

The 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.
  • 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.
In both cases, the price level moves toward the equilibrium price level. Moreover, the gap between aggregate expenditures and real production is closed.

<= DISECONOMIES OF SCALEDISEQUILIBRIUM, LONG-RUN AGGREGATE MARKET =>


Recommended Citation:

DISEQUILIBRIUM, AGGREGATE MARKET, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: June 17, 2021].


Check Out These Related Terms...

     | aggregate market | equilibrium, aggregate market | aggregate market analysis | long-run aggregate market | short-run aggregate market | equilibrium, long-run aggregate market | equilibrium, short-run aggregate market | disequilibrium, long-run aggregate market | disequilibrium, short-run aggregate market |


Or For A Little Background...

     | aggregate demand | aggregate supply | aggregate expenditures | macroeconomic sectors | macroeconomic markets | long-run aggregate supply | short-run aggregate supply | aggregate demand curve | long-run aggregate supply curve | short-run aggregate supply curve | price level | GDP price deflator | real gross domestic product | equilibrium |


And For Further Study...

     | output gaps | recessionary gap | inflationary gap | aggregate market shocks | self correction, aggregate market | Keynesian economics | monetary economics | classical economics |


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