Economic Equilibrium Operating Economy

Question: Discuss about the Economic Equilibrium for Operating Economy. Answer: Introduction Stable economic equilibrium can be defined as a state whereby economic forces that are reflected by aggregate demand and aggregate supply intersect each other(Nelson, 2009). An underlying assumption for the case is that external influences will not disrupt the equilibrium; hence they will not have any impact on the various economic variables. In economics various cases of equilibrium encompasses Market Equilibrium where price is established at an equilibrium position relative to demand and supply. But concept of economic equilibrium is applicable in cases of imperfect competitive markets as well, whereas the theory was devised to account for perfect market. This type of equilibrium is established as it forms the basic properties of equilibrium. The scope of current analysis examines the fact that a stable economic equilibrium requires the economy to be operating at an output level at which the aggregate demand curve, the long run aggregate supply curve and the short run aggregate sup ply curve all intersect. Analysis A condition of macroeconomic equilibrium is a condition in the economy where quantity of aggregate demand equals to aggregate supply. Aggregate demand establishes a relation between price levels, firms, and quantity of real GDP demanded government and net exports. At the beginning of discussion for the stable economic equilibrium at the macroeconomic level and analyzing possible justification for the same, the starting point it is assumed that at stable equilibrium aggregate demand will intersect aggregate supply of the long run with aggregate supply curve of the short run. In case there is any sort of discrepancies in either demand or supply then there is bound to be changes in prices, inflation and rate of unemployment in the economy. In the short-run unexpected decreasing of aggregate demand will push up excess supply of resources, that will inevitably lead to decrease in resource prices. Short-run aggregate supply establishes relation amongst price levels and quantity of GDP(Negishi, 2014). This, will lead to impacting of unemployment which will make prices go down. Hence, in the long run lower resource costs will make the aggregate supply curve move to the right. The economy will aim to attain stable equilibrium by producing output levels that can be achieved by way of full employment at a price level lower than before. Aggregate demand is affected by changes in governmental policies in taxes or other areas, changes in household and firms expectations and due to changes in foreign variables as relative income levels amongst countries, exchange rates and so on. In the long-run aggregate supply price level and quantity of real GDP supplied which is vertical reflects potential GDP. Shift in the aggregate supply curve reflects that increase in GDP or economic growth can be due to increase in resources, increase in machinery and equipment and new technology. In stable equilibrium aggregate demand, aggregate supply long run is assumed to be at equilibrium with aggregate supply of short run. At this level it is assumed that a democratic government will intervene to ensure that employment levels are reached and unemployment is removed. At optimum levels of employment the price levels for aggregate demands is attended and supply levels for this level is reached(Starr, 2011). For the aggregate supply curve in the short run any impacts on it will lead to changes in the demand curve till it stabilizes to reach equilibrium levels. By automatic adjustment mechanisms real GDP will be impacted in case of changes experienced in aggregate demand or aggregate supply of quantities. During short-run periods decrease in aggregate demand will lead to recession but in the long run it might cause decrease in price levels. In short run increase in aggregate demand will eventually lead to increase in real GDP. However, in the long run it will lead to increase in price levels. Again in case of shift in the graph employees will accept lower wages till prices stabilizes in the economy and they are able to get proper prices for the same. Short-run will be determined by decreasing of aggregate demand which will lead to supply of excess of resources, ultimately reducing resource prices including labor wages. As unemployment will increase price going down will lead to output reduction. This will lead to shifting of the aggregate supply curve, hence economy will be producing levels of output with full levels of employment at a lower levels of price to attain equilibrium. Basic aggregate demand and supply model is dynamic and provides for increase in labor force, technological change and capital stock. Aggregate demand curve will only shift changing levels of stable equilibrium due to major changes as consumer spending changes, changes in the firm, governmental changes and so on. Thus, at every point the system will try and attain equilibrium till systems stabilizes. Inflation can disrupt the economic equilibrium levels causes total spending that takes place in an economy faster than compared to total production. Any impacts from inflation levels will disturb levels of equilibrium and will shift the aggregate demand curve. Even at this juncture to attain equilibrium prices and employment levels will stabiles causing the aggregate short-run supply curve, aggregate long run supply curve and aggregate demand curve to intersect at a particular price levels. Government intervention to maintain such equilibrium levels is an integral factor that invariable impacts. Democratic Government has an active role to play to determine equilibriums levels, when the levels of unemployment is high government pushes up demand for resources and extending demand levels by enhancing consumption levels. This affects the levels of job creation and as prices go up more and more people are employed in the economy to generate adequate supply in the long run. The government at every point affects and changes its economic policies to reduce or increase taxes on relevant items such as to inflict control and maintain larger economic stability and equilibrium levels. Conclusion In the discussion on economic equilibrium it has been demonstrated that all the three curves needs to intersect. Macroeconomic equilibrium can be defined as the condition itself whereby all the various factors meet. Aggregate demand and aggregate supply help determine the total value of goods and services produced in the economy at a particular period of time. Aggregate demand is the total value of such goods demanded whereas aggregate supply forms all the goods supplied to meet the quantities demanded of such products. Therefore, any related variable affecting these factors will impact their price levels. Employment, inflation and government plays relevant factors in determining such levels of equilibrium. Any efforts from macroeconomic variable or otherwise in external variables might lead to impacting the curve such that they are able to re-orient themselves to accomplish the position where it was previously. While all variables are interdependent on each other they play a major role in demonstrating their importance or how each functionality can affect the other in a dynamic way. Reference Lists Negishi, T. (2014). History of economic theory (Vol. 26). . Elsevier. Nelson, R. a. (2009). An evolutionary theory of economic change. Harvard University Press. Starr, R. (2011). General equilibrium theory: An introduction. . Cambridge University Press.