Working a Graph

Disequilibrium Short-Run Aggregate Market

Disequilibrium in the short-run aggregate market results at price levels that do not correspond to intersection of the AD curve and the 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 short-run aggregate market results if the price level has a value of 11. This price level does not correspond to the intersection of the two curves. In particular, aggregate demand is less than short-run aggregate supply, meaning aggregate expenditures are less than real production. 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 short-run 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 two curves. In this case, aggregate demand is greater than short-run aggregate supply, meaning aggregate expenditures are greater than real production. 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 key feature of this adjustment process for the short run is that price level changes induce changes in both aggregate expenditures and real production. The reason for changes in real production lies with short-run price rigidity, especially resource prices. Rigid resource prices mean resource owners respond to price level changes with changes in productive effort and thus changes in real production. As such, changes in the price level can induce changes in short-run aggregate supply, making it greater or less than full-employment real production.

• Suppose, for example, that the price level happens to be above the equilibrium, such as a value of 11. Aggregate expenditures fall-short of real production causing economy-wide product market surpluses. These surpluses trigger lower product prices, again economy-wide, which result in a decline in the price level. This adjustment continues until the price level once again reaches the equilibrium value of 10. As the price level falls aggregate expenditures increase and real production declines until product market surpluses are eliminated.


• Now suppose that the price level is below the equilibrium, such as a value of 9. Aggregate expenditures exceed full employment real production causing economy-wide product market shortages. These shortages trigger higher product prices, again economy-wide, which result in a rise in the price level. This adjustment continues until the price level once again reaches the equilibrium value of 10. As the price level rises aggregate expenditures decrease and real production rises until product market shortages are eliminated.