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The transition from the short-run to the long-run may be done by considering some short-run equilibrium that is also a long-run equilibrium as to supply and demand, then comparing that state against a new short-run and long-run equilibrium state from a change that disturbs equilibrium, say in the sales-tax rate, tracing out the short-run ...
The first term in the RHS describes short-run impact of change in on , the second term explains long-run gravitation towards the equilibrium relationship between the variables, and the third term reflects random shocks that the system receives (e.g. shocks of consumer confidence that affect consumption). To see how the model works, consider two ...
The point where the IS and LM schedules intersect represents a short-run equilibrium in the real and monetary sectors (though not necessarily in other sectors, such as labor markets): both the product market and the money market are in equilibrium. [12] This equilibrium yields a unique combination of the interest rate and real GDP.
Only in the short run can a firm in a perfectly competitive market make an economic profit. Economic profit does not occur in perfect competition in long run equilibrium; if it did, there would be an incentive for new firms to enter the industry, aided by a lack of barriers to entry until there was no longer any economic profit. [11]
Therefore, the properties of the model at the beginning are preserved in long run equilibrium, the original equilibrium was stable. Short run disequilibrium. The standard approach is to rewrite the basic equations [6] & [7] in terms of the deviation from the long run equilibrium).
In the short run (and possibly in the long run), markets may find a temporary equilibrium at a price and quantity that does not correspond with the long-term market-clearing balance. For example, in the theory of " efficiency wages ", a labor market can be in equilibrium above the market-clearing wage since each employer has the incentive to ...
The DAD (Dynamic aggregate demand) curve is in the long run a horizontal line called the EAD (Equilibrium aggregate Demand) curve. The short run DAD curve at flexible exchange rates is given by the equation:
Whereas the long-run aggregate supply curve (LRAS) is vertical, the short-run aggregate supply curve will have a positive slope [5]: 377 or, in the extreme case of a completely constant price level, be horizontal. [5]: 268 The equation for the aggregate supply curve in general terms may be written as