Concept Of Equilibrium Demand And Supply

Question: Discuss about the Concept of Equilibrium Demand and Supply. Answer: Introduction The aim of the government of any country is to assure the presence of the stability within the country. According to Ehrenberg Smith (2016), it can be stated that the necessary as well as the sufficient circumstances within the country helps to achieve the equilibrium position. The word equilibrium has been followed from Physics; however, it is widely used in economics literature. As per the concept of equilibrium, it can be stated that it is a state where two major opposite forces interact with each other in order to reach to that state. In this stage, the power of these two states is getting nullified. In terms of economics, in equilibrium point the economy can identify the optimal quantity of the goods and the services at the definite price level where the supply of the products would be balanced with the demand side of the product. This study has highlighted the way, with which the government of an economy would be able to intervene and the market can restore equilibrium within the country. In a synopsis, this study will discuss the some important economics concept such as short run, long run, aggregate demand as well as aggregate supply. In this context, the role of the government of a country will also describe. Analysis Notion of equilibrium: As per the statement of Walras (2013), it can be stated that equilibrium is achievable in terms of the procedure of the competition. The competition may occur either in the free market or in the market; which is regulated by the government of an economy. The types of the equilibrium are based upon the characteristics of the occurrence. In this purpose, Ehrenberg Smith (2016) stated that the equilibrium may be of static or dynamic in nature. In addition, the equilibrium may be of partial or general type. This section will try to identify the necessary condition for occurring the static type equilibrium. In this stage, the economy will not deviate from the optimal situation. On the other hand, it can be stated that there are three market differentiations within a nation such as product market, financial market and the labour market. In this context, Rios, McConnell Brue (2013) opined that if there is smoother operation of the firms and equilibrium in all of these three markets, then it can be inferred that the global stability would be achieved. The aggregate demand (AD) curve can be drawn with the help of CKM theory of the IS-LM model. The theory regarding the AD-AS curve can describe the long term stability of the market. Concept of aggregate demand: The demand formulated by the purchasers within a country can be described with the help of the aggregate demand. The aggregate demand curve highlights the willingness of an economy to pay a cost for the products. The downward sloping demand curve passes through the position, where actual expenditure is equivalent to the planned expenditure. Figure 1: AD curve (Source: Created by author) Concept of aggregate supply: The total production of the goods and services of an economy can be identified at a particular point, which can be described as the concept of aggregate supply. As opined by Ehrenberg (2016), there are three parts in the aggregate supply curve. These parts are such as horizontal region (or Keynesian part), the upward rising region and lastly the vertical part (or Classical theory). However, it can be mentioned that the long run aggregate supply curve is vertical in characteristics. Figure 2: Aggregate supply curve (Source: Created by author) Short run equilibrium: In the concept of Economics, the capital of an economy can be assumed as the fixed determinant. The interaction of the economic components in the short run can be interpreted as the following: Figure 3: Short run equilibrium (Source: Created by author) From thee above figure, it can be observed that short run equilibrium occurs when the AD and the AS curve cross each other. The equilibrium price and quantity can be determined by the level of P and Y respectively. In this connection, it can be mentioned that the aggregate demand can be increased due to some definite reasons. As a result, the demand curve can shift to the rightward. This can be seen in the above diagram and the demand curve has shifted from AD to AD1. As the capital is assumed as the fixed factor of input and ass it belongs to the short run, therefore, the net supply and the AS curve would not be changed. As a result, it can be mentioned that the in the interaction point of AD and AS curve such as the interaction of price level P1 and output level Y1, the new equilibrium of the economy would be generated. Moreover, it can be added that the shift of AD curve would increase the output level and also increase the price level of thee economy. In this situation, the government of a country would not be able to choose the appropriate policy (De Grauwe, 2016). In order to describe the reason behind this situation, it can be stated that rising of output level is desirable whereas the rising of price level is not desirable. As higher inflation rate is plague for a country, therefore, the government requires to intermediate and needs to decrease the price level. Long run equilibrium: Figure 4: Long run equilibrium (Source: Created by author) As per the above figure, it can be observed that the initial equilibrium occurs where the AD, LRAS and SRAS curve intersect to each other. With the shift of demand curve to the outward, then price will be increased, however, output level will not be raised in order to maintain the equilibrium. Therefore, with these constrained supply and higher price level, AD curve requires to shift to backward. On the other hand, government aims to control the fiscal and the monetary policy. Therefore, the equilibrium will be restored in long run in order to get the stable equilibrium in an economy. Conclusion The above discussed situation will arise when three different types of markets are in the equilibrium position. However, in the long run, the equilibrium will arise at a certain point where the economy gets restored with the help of government intervention. As a result, it can be mentioned that government plays a vital role in order to maintain an economic balance by considering the natural rate of employment as well as by controlling the inflation rate within the country in long run. Bibliography De Grauwe, P. (2016). Economics of monetary union. Oxford university press. Ehrenberg, R. G. (2016). Modern labor economics: Theory and public policy. Rios, M. C. (2013). Economics: Principles, problems, and policies. McGraw-Hill. Walras, L. (2013). Elements of pure economics.