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What does an aggregate demand and supply graph look like at equilibrium with both short...

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user4724865 | eNotes Newbie

Posted April 23, 2013 at 6:36 PM via web

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What does an aggregate demand and supply graph look like at equilibrium with both short and long-run aggregate supply?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 23, 2013 at 7:01 PM (Answer #1)

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An aggregate demand (AD) and aggregate supply (AS) graph looks very much like any graph of supply and demand for a single product.  There are only a few differences.

First, there are differences in the labeling of the axes.  On a supply and demand graph, the vertical axis is labeled with “price” and the horizontal axis is labeled with “quantity.”  In a graph that shows AS and AD, the vertical axis is typically labeled with “price level” and the horizontal axis is labeled with “real domestic output” or “Real GDP.”

In a regular supply and demand graph, there is a demand curve that slopes downward from left to right and a supply curve that slopes upward.  The same is true in a graph that shows AS and AD.  The AD curve slopes downward and the short-run AS curve slopes upward.  In an AS-AD graph, there is another curve.  This is the long run aggregate supply curve (LRAS).  It is vertical.  Equilibrium is at the point where all three lines intersect.

Please refer to this link for a visual representation.  This link shows two AS and two AD curves because it is meant to show the effects of changes in AS and AD.  However, you can see the basic setup of such a graph even so.

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