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Current time:0:00Total duration:10:11

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MOD‑2 (EU)

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what we're going to do in this video is talk about the notion of equilibrium in a macroeconomics context so let's review a little bit of what we've already studied about aggregate demand and aggregate supply so this vertical axis here that is the price level for the economy that we are trying to study and this horizontal axis right over here this would be the real GDP for that economy the real g.d.p and now I could draw an aggregate demand curve in previous videos we've talked at length why economists like to model it as a downward sloping curve but once again take all of these things with a grain of salt there's a lot of assumptions break baked in and then I can also draw aggregate supply aggregate supply and this would be short-run aggregate supply upward sloping curve so I'll just call that short-run aggregate supply and I'll call that short-run aggregate supply one because we might look at other potential aggregate supply curves I could also look at other potential aggregate demand curves but let's just do that for now so given these curves what would be the price level and the level of output for this economy pause this video and think about it well some of y'all might just very naturally say well it would be the output in the price level that corresponds to this point of intersection and if you said that you would be correct so this would be our short-run equilibrium output let me label that so that right over there is our short-run equilibrium equilibrium equilibrium output corresponds to where the short-run aggregate supply intersects to the aggregate demand curve and then this right over here would be our equilibrium price level let's call that PL 1 now why do we feel good that this would be the short-run equilibrium output and this would be the price level well let's imagine what would happen if we were at a lower price level let's say right over here at that price level we see that aggregate demand is outstripping aggregate supply the output that added that the demand wants is much higher than the output of the aggregate the short-run aggregate supply and so that would be a shortage situation there's not enough output for all of that demand and what would likely happen in that situation well the the folks producing that output would probably say hey I'm gonna charge a little bit more for my output and as they're charging more they'll say maybe I also produce a little bit more output and they'll move up the curve towards that equilibrium point and then on the demand side people would say hey I'm not getting the output I need I'm willing to pay more for it but as the cost of that output also goes up the demand the output demanded would go down and we end up back at that equilibrium point and we could do the same thought exercise if for some reason we were at a price level above PL 1 in this situation aggregate supply short-run aggregate supply is a good bit higher than aggregate demand and so you have more output than what is being demanded and so what's likely to happen well the suppliers the people producing the output will say well I'm gonna charge a little bit less for my output and produce less and then similarly those demanding will say hey there's this glut of output I'm gonna pay less for that output but as they're able to pay less for it they'll say hey I want more and more of it and we get back to the equilibrium point now what we've talked about so far is in the short-run but some of you might be saying well what about the long-run and in previous videos we have talked about long-run aggregate supply and so let's say that this curve right over here represents the long-run aggregate supply curve and where it intersects the horizontal axis this y sub F you could view this as the output of this economy at full employment and it's really the sustainable output of this economy at full employment and so what's going on in the graph right over here our equilibrium output is what our short-run equilibrium output is below our full employment output and so we have a gap so there's a negative to go from our full employment output to our equilibrium output and so if we want to think about this in the context of the business cycle where would we be on it so let's draw the business cycle so now I'll make the vertical axis the level of real output so this would be real GDP right over here and then on the horizontal axis this will be the passage of time that is time and so what typically so at any given point in time there will be a y sub F there will be some sustainable potential output for that economy and when I say sustainable it means you know people are sleeping properly resting properly you're not unsustainably depleting resources and so for example at this point in time that might be the Y sub F and that may be a few years later may be the population has grown there's more infrastructure technology has improved so now they can sustainably produce more and then a few years after that maybe they could produce even more population growth they've they've think thought about better ways to arrange the resources and the economy technology improves and so you could imagine a world where that full employment output could just grow in a very nice way like this or it could just grow nicely like this but we know that's not the way real economies work they experience the business cycle and the business cycle looks more like this so it will look more like this where you have your peaks and these troughs a boom and bust cycles sometimes people will talk about it and the parts of this curve where you have increasing real GDP like there or there or there we would call those expansions so that is economic expansion and the parts where GDP is receding so for example right over here right over here we would call those recessions or recessions but let's go back to our aggregate demand and aggregate supply world right over here this equilibrium point y sub 1 what point could that correspond to on this on this graph right here of the business cycle and let me label that this is the business the business cycle what pause this video think about what point it could correspond to - well we're at a point where our short-run equilibrium output is below our full employment output our potential output our sustainable full potential output so this would correspond to some point where our real GDP is sitting below this blue curve or this blue line the way I've drawn it and so y sub one could for example be this point or it could be that point or it could be that point and so if it was this one right over here then that right over there would be Y sub one and and this right over here would be the Y sub F would be the Y sub F for this point in time now as we go forward in time this y sub F we see this economic growth it could move to the right as population grows as we have better technology etc etc etc but you're probably thinking well what about other points are that can we are there others possible scenarios and my answer to you would be absolutely so you could imagine a world where the equilibrium output is to the right of our potential output and I will construct that by making a different short-run aggregate supply curve although I could also do that by shifting the aggregate demand curve and we'll do that in future videos but imagine a situation like this imagine so I'll call this short-run aggregate supply - and now this is our equilibrium equilibrium output y sub 2 and it corresponds to price level price level 2 right over here and notice here there's a gap but it's a positive gap we our actual output is above our sustainable output and so for example this could correspond to maybe at this point if it does correspond to this point so if this was Y sub 2 then this would be our current Y sub F I didn't actually shift it but hopefully you're getting the general idea and you're saying well how can you produce beyond full employment how can you reduce beyond your sustainable potential well this is an economy that is producing output in an unsustainable way unemployment is unusually low you have maybe depleting resources people are working too hard they're getting stressed out they're not sleeping properly however you want to think about it it's not considered sustainable and then you have a third scenario where your short-run equilibrium output actually equals your full employment output and so that could be this scenario right over here so this would be our short-run aggregate supply three and notice over here our equilibrium output y sub three is equal to our full employment output and when this happens this is considered a long-run equilibrium so let me write that down that is considered a long-run equilibrium equilibria and points that correspond to long-run equilibria on this business cycle right over here would be this point right over there that point at that point and at that point so I'll leave you there in future videos we will actually think about how aggregate demand and short-run aggregate supply will shift and connect it even further to the cycles in the business cycle

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