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June 25, 2022 

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LONG-RUN MARGINAL COST: The change in the long-run total cost of producing a good or service resulting from a change in the quantity of output produced. Like all marginals, long-run marginal cost is the increment in the corresponding total. What's most notable about long-run marginal cost, however, is that we are operating in the long run. Unlike the short run, in which at least one input is fixed, there are no fixed inputs in the long run. As such, there is only variable cost. This means that long-run marginal cost is the result of changes in the cost of all inputs.

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FULL EMPLOYMENT, LONG-RUN AGGREGATE SUPPLY:

The condition that exists when all resources are engaged in production. In practice, however, this condition is virtually impossible to achieve. An economy ALWAYS has some unemployed resources, particularly frictional and structural unemployment. The key characteristic of long-run aggregate supply is that full-employment production is maintained at ALL price levels. In the long run, when all prices and wages are flexible, all markets (financial, product, and especially resource) are in equilibrium, and the level of real production fully employs all available resources.
Full employment is theoretically considered the state of the economy in which ALL resources are engaged in the production of goods and services. From a practical perspective, full employment is achieved when the quantity of resources supplied is matched by the quantity of resources demanded. While all resources are not necessary employed at any given moment, the number of jobs available matches the number of workers seeking employment.

In particular, frictional unemployment and structural unemployment exist even though the quantity demanded matches the quantity supplied.

  • Frictional unemployment results because resources are in the process of moving from one production activity to another, which does not happen instantaneously. The time needed to match up resources with production depends on information availability and the degree of geographic separation.

  • Structural unemployment results because resources, especially labor, are configured (trained) for a given technology but the economy demands goods and services using another technology. the productive capabilities of the resources do not match the requirements of the productive activities.
Both types of unemployment are a natural consequence of a healthy, efficient, and expanding economy. And unlike cyclical unemployment, neither can be eliminated totally, especially by using stabilization policies.

For this reason, the working definition of full employment used in macroeconomic analysis is based on market equilibrium. For all practical purposes full employment exists when the quantity of resources demanded is equal to the quantity of resources supplied. The number of available jobs is equal to the number of available workers. This does not require that ALL available jobs are filled. This does not require that ALL available workers have jobs. With the persistence of frictional and structural unemployment, neither of these can happen, EVER!

This market equilibrium notion of full employment means that resource prices reach equilibrium levels and do not change. There are NO shortages or surpluses in resource markets to prompt changes in resource prices. This lack of change in resource prices goes hand-in-hand with the notion of long-run price flexibility. Resource prices have adjusted as much as needed to eliminate market imbalances. No imbalances persist and further price changes are not forthcoming. (Unless determinants shock the system and create new imbalances.)

The key implication is that the long-run aggregate supply is ALWAYS equal to full-employment production. It matters not what the price level is, it can be high, it can be low. Full-employment production is maintained. In the long run, the economy never produces more or less than full-employment production. Producing more or less than full-employment production is a short-run phenomenon, not a long-run one.

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Recommended Citation:

FULL EMPLOYMENT, LONG-RUN AGGREGATE SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 25, 2022].


Check Out These Related Terms...

     | aggregate supply | long-run aggregate supply | long-run aggregate supply curve | slope, long-run aggregate supply curve | long-run, macroeconomics | flexible prices |


Or For A Little Background...

     | gross domestic product | price level | GDP price deflator | real gross domestic product | full employment | unemployment | frictional unemployment | structural unemployment | overemployment | macroeconomic markets | resource markets |


And For Further Study...

     | change in aggregate supply | change in real production | aggregate supply shifts | short-run aggregate supply | short-run, macroeconomics | aggregate supply determinants | aggregate demand | aggregate market analysis | aggregate market | slope, short-run aggregate supply curve | business cycles | circular flow | Keynesian economics | monetary economics | short-run aggregate supply and market supply |


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