Concept of short – run

In macroeconomics, short – run may be defined as a period of time when ‘technology’ as a factor remains constant.

                                                                                      OR

Short – run in an economy can be defined as the period of time during which, level of output is determined only by the level of employment. Higher the level of employment, higher would be the level of output and vice – versa.

Equilibrium output

Equilibrium output refers to a situation, where,

 

Aggregate Demand = Aggregate Supply

                            AD = AS

 

 

 

 

 

 

It signifies that whatever the producers intend to produce during the year, is exactly equal to what the buyers intend to buy during the year.

 

Since, Aggregate Demand = Consumption + investment

Or                                      AD = C + I

And aggregate supply = Consumption + saving

Or                                      AS = C + S

 

We can write the equation of equilibrium output as under:

Equilibrium Output = AS = AD

= C+ S = C + I

S =I

Or

Thus, equilibrium output is also achieved when,

Saving = Investment = S = I

 

Determination of Equilibrium Output: AS = AD approach, S = I Approach

The determination of income and employment depend on the level of aggregate demand and aggregate supply. We have two approaches to study the determination of equilibrium output /income :

  1. AS = AD approach
  2. S = I approach

 

 

  1. As = AD Approach

According to modern theory of income and employment determination, in any economy at any given time. Income and employment are determined at that level where aggregate demand is equal to aggregate supply. It can be illustrated with the help of diagram given below:

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By Ravi Kashyap

Commerce Expert

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