Posts tagged equilibrium price

This title refers to a lot of theory which it is worth having explained to you first by a teacher of Economics. Having looked at Aggregate Demand, we now introduce Aggregate Supply which gets a bit complicated with two different schools of thought, and we also need to refer to three possible different equilibrium situations (at full employment, the deflationary (or recessionary) gap and the inflationary gap). Equilibria is simply the plural of equilibrium.

Here are the syllabus requirements:

• Aggregate supply

a) short-run

b) long-run (Keynesian versus neo-classical approach)

• Full employment level of national income

• Equilibrium level of national income

• Inflationary gap

• Deflationary gap

Make sure you can define each of these as well as explain them.

To recap on inflationary and recessionary (deflationary) gaps, refer to this video by ACDCLeadership but note that it explains it from a neo-classical perspective. He then goes on to explore fiscal and monetary policy responses, which we will explore in more detail later, but is worth watching now.

A quick and very useful summary of some of the key differences is given by ACDCLeadership in his video Classical vs. Keynesian Aggregate Supply- Macroeconomics. He is delivering this to an AP audience (as opposed to IB). Notice that he combines Keynesian, Intermediate and Classical ranges into what we can simply think of as the Keynesian AS curve.

This next clip could also help understanding already reached in class / revised through the text book.

pajholden on Keynesian Vs Monetarist on the LRAS curve

He refers to those holding the neo-classical perspective as ‘monetarists’. Good for understanding how the market for labour is understood under each perspective. Notice the simplified (original) Keynesian AS curve which he starts off with for the Keynesian perspective.

http://www.youtube.com/watch?v=QG56sFoNNa8

BrynJonesOnline on Aggregate Demand & Aggregate Supply

Notice that his AS curve is very similar to the Keynesian version. So he assumes a Keynesian perspective (without saying it), and it is good for showing the three different phases / segments along it. Note that at 2 minutes 10 seconds, he is now mentioning supply side bottle necks (again without actually saying it). For now, you do not need to view any further from 2 minutes 45 onwards (after the interlude) as he now moves on to AS changes – (a) increased costs and (b) successful supply side policy which we explore later.

From http://reffonomics.com, this slideshow also combines the Keynesian and neoclassical perspectives on to one graph whereas we have preferred to keep them separate. However, this is very good for getting the history of thought behind these two perspectives, including the name of influential economists, and for seeing the simple differences between the Keynesian and Neo-classical view of AS. Note also that they put Yfe (Full employment level of national income – what they say is 97%)) at the vertical segment whereas some text books prefer to think of that as the maximum level of employment (100%).

Click here: Aggregate Supply Ranges

Finally, from the same website, this slideshow is excellent for summarising where we are and indicating where we are headed next with possible government policies

Macroeconomics Graphs