In the market, every firm gets highly affected with the availing business environment. Further, mainly the economic environment has gained a huge priority to influence the market as any change in it will directly have an impact on the demand and supply of goods and services provided in market (Ackermann ed., 2012). Thus, it is important to maintain equilibrium situation in economy so as to balance the demand and supply in a proper manner. In this report, an analysis is made to identify importance of stable economic equilibrium situation in the market.
Equilibrium refers to the state in which economic forces which mainly include supply and demand are highly balanced. Further, it can be said that if there is no influence by the external forces than price and quantity will remain constant at an equilibrium value (Bernstein, 2012). It is seen that aggregate demand curve and supply curve do not shift independently as they are indirectly related to each other and have a joint impact on the price or output of products and services. Thus, it can be determined by using the AS-AD model.
Illustration 1: Graph 1
From the above table, it can be determined that with the intersection of short-run and long-run aggregate supply curve and the aggregate demand curve, they together develop the situation of equilibrium level of price as well as output. Thus, variations in demand and supply curve develops with the problems in market (De Clercq, Danis and Dakhli, 2010).
Shifts in aggregate demand
In this, it has been stated that the main cause for shift in economy is due to aggregate demand. Further, this can be affected by many factors which include consumers, government, etc. Thus, any type of expansionary policy highly shifts demand curve to the left. Moreover, as the long-term supply curve is fixed due to many reasons which may involve factors of production, short-term aggregate supply shifts towards the left (Fidrmuc and Korhonen, 2010). It depicts that with the change in aggregate demand, it will only have impact on the price of products and services which are served to the customers.
Illustration 2: Graph 2
Further, in the long run, level of expected prices is aligned with the actual price level determined by people. This is because; firms, workers and producers make adjustments with their expectations. With this, short-run aggregate supply curve shifts with the aggregate demand curve till the time when long-run, short-run and aggregate demand curve; all intersect each other at a single point. In the above graph, it has been shown by point C where new equilibrium situation has been achieved (Kiss, Danis and Cavusgil, 2012). Further, it can be said that with the expansionary policy, level of price and output has increased in short run but in long run, only price level is increased.
Illustration 3: Graph 3
Above graph shows the opposite situation of prior one. In this, aggregate demand curve shifts to the left side. It can be depicted by saying that if Fed pursues with the contradictory monetary policy, than aggregate demand curve moves to the left side. It can be seen in the graph that demand curve moves from 1 to 2. Thus, the intersection of short-run curve 1 and the demand curve has moved to point B. As a result, level of output and the price has decreased. Thus, it shows a new point of short-run equilibrium. But in the long run, price level matches with the expected price made by firms, producers, etc. With the contractionary policy, it has a decrease in output and price in the short run but in the long run, only price level is decreased (Mandell, 2015).
Thus, by the same, it can be said that with the change in demand and supply curve, equilibrium level also gets altered accordingly. Moreover, it has also been evolved that there are changes in the short-term and long-run effects as mostly, the output level is decreased or increased in the short-run but when it is extended to the long run then only the price level is affected. Therefore, determination of supply and demand of products and services help in providing the prices for products developed in market (Sanchez and Ricart, 2010). Thus, it is highly required to attain a stable equilibrium position in the economy so as to manage the demand and supply of goods in an efficient manner. Moreover, this reduces with the situation of high prices as with equilibrium, market will be stable and can help to attain a sound economy in the market. Thus, it can be said that with the use of AS-AD model, effects of macroeconomic policies are determined in an effective manner. This is highly helpful for company to develop their products as per the availing situation in market which includes demand as well as supply for certain products.
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From the above report, it can be concluded that with the changes in demand and supply, position of equilibrium changes from one point to other in the economy. Further, it has a great impact on the factors of production as they have to make modifications with the demand and supply of products in market. Thus, it is important for the government to develop policies which have a positive impact on companies and can grow in the industry. AS-AD model is highly efficient for every organization to analyse the effects of macroeconomic policies. Thus, it is a powerful tool to collect the information related to terms included in macro-economy.
- Ackermann, S. J. ed., (2012). Are small firms important? Their role and impact. Springer Science & Business Media.
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- De Clercq, D., Danis, W. M. and Dakhli, M. (2010). The moderating effect of institutional context on the relationship between associational activity and new business activity in emerging economies. International Business Review. 19(1). pp.85-101.
- Fidrmuc, J. and Korhonen, I. (2010). The impact of the global financial crisis on business cycles in Asian emerging economies. Journal of Asian Economics. 21(3). pp.293-303.
- Kiss, A. N., Danis, W. M. and Cavusgil, S. T. (2012). International entrepreneurship research in emerging economies: A critical review and research agenda. Journal of Business Venturing. 27(2). pp.266-290.
- Mandell, L. C. (2015). Misogynous Economies: The Business of Literature in Eighteenth-Century Britain. University Press of Kentucky.