Economics question - long run and short run - Macro

[Guest]

I am so confused about the long run and the short run. According  to my book, long run supply is in a long period of time , economy can adjust their cost of production freely with response to the change in price level, thus , the long term supply curve is vertical . 

 

Here is the question, 

if the long run supply curve shift to the right ( increase in potential output), why will the short run supply curve shifts to the right as well? And  why will the demand curve shifts as well?

 

Also will the change in short term supply brings the long term supply curve  change as well?

[behaaa]

Because your short run is the representation of your long run aggregate demand curve. This is all assuming the classical economic school of thought, or the Hayek (however you call it) 

[EconDaddy]

Hi,

 

First of all it's good to clarify whether you are looking at micro or macro. As far as I can tell you're looking at macro and the aggregate supply and aggregate demand (which are different from the micro demand/supply where you're only looking at a specific market).

The reason why the short-run aggregate supply (SRAS) will shift together with the long-run aggregate supply (LRAS) is a simple thing: the long-run is made up of a series of short-runs. From this it follows, that if the LRAS has moved to the right, so has the SRAS curve. The AD curve does not necessarily have to shift to the right but in most cases does. Why? Because otherwise there would be quite a huge deflation shown in the diagram which is rarely the case with countries experiencing steady economic growth. Instead, an increased AD (at every price level) is what usually goes hand in hand with economic growth.

 

Yet, as behaaa pointed out very well, according to neoclassicals, AD on its own is not enough to boost real GDP growth in the longrun, a change in AD merely affects the price levels, that is why the LRAS curve is vertical.

Your last question: not necessarily, only if the increased SRAS curve stays where it is. Sometimes economies experience a sudden increase of AS which is then offset by a decrease. In this case we assume that the long-run aggregate supply has not changed.

 

Let us know if you have you need further clarification.

[Guest]

Hi,

 

First of all it's good to clarify whether you are looking at micro or macro. As far as I can tell you're looking at macro and the aggregate supply and aggregate demand (which are different from the micro demand/supply where you're only looking at a specific market).

The reason why the short-run aggregate supply (SRAS) will shift together with the long-run aggregate supply (LRAS) is a simple thing: the long-run is made up of a series of short-runs. From this it follows, that if the LRAS has moved to the right, so has the SRAS curve. The AD curve does not necessarily have to shift to the right but in most cases does. Why? Because otherwise there would be quite a huge deflation shown in the diagram which is rarely the case with countries experiencing steady economic growth. Instead, an increased AD (at every price level) is what usually goes hand in hand with economic growth.

 

Yet, as behaaa pointed out very well, according to neoclassicals, AD on its own is not enough to boost real GDP growth in the longrun, a change in AD merely affects the price levels, that is why the LRAS curve is vertical.

Your last question: not necessarily, only if the increased SRAS curve stays where it is. Sometimes economies experience a sudden increase of AS which is then offset by a decrease. In this case we assume that the long-run aggregate supply has not changed.

 

Let us know if you have you need further clarification.

Thanks AGAIN.   That is really helpful .

[EconDaddy]

No worries