Macroeconomic Equilibrium: Definition & Overview

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  • 0:05 Macroeconomic…
  • 0:44 Macroeconomic Equilibrium
  • 1:33 Aggregate Supply and Demand
  • 2:55 Achieving Equilibrium…
  • 4:33 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

When customers want something and businesses have what they want, you could say that supply and demand is equal. In this lesson, we'll learn why this happens and what factors contribute to that state of equilibrium.

Macroeconomic Equilibrium Defined

Did you ever have a lemonade stand as a kid? If so, you know how exciting it was to sell a cup and gather those new, shiny coins. Neighbors would walk over, buy a cup, and hopefully tell others of the newest business venture on the block. When the day was over, the goal was to sell every cup of lemonade. However, there was more to just making sure you sold every cup. You also wanted to be sure you had enough cups for all the neighbors that needed that thirst quenching cup of lemonade on a hot summer day. You see, what you may not have realized as a kid, is that you were striving to reach macroeconomic equilibrium, in which the quantity of lemonade demanded equaled the quantity supplied.

Macroeconomic Equilibrium

In order to fully understand how we arrive at an equal state, let's define some key terms first. Macroeconomic equilibrium is a condition in the economy in which the quantity of aggregate demand equals the quantity of aggregate supply. If there are changes in either aggregate demand or aggregate supply, you could also see a change in price, unemployment, and inflation. For example, if the aggregate demand for your lemonade is too low, then your new business venture won't need to keep making as much lemonade and if you hired any friends to help you run your lemonade stand, you may have to let them go. This is because if customers are not buying lemonade, you won't be making money, which means you won't be able to pay any of your friends. When this happens at large companies, workers are often laid off, which ultimately causes the unemployment rate to increase.

Aggregate Supply and Demand

The total economic output of goods and services in an economy at a certain time period is known as aggregate supply. For instance, aggregate supply is the total amount of lemonade made during a specific time. Factors such as labor, capital, natural resources, and technology affect aggregate supply in the long run. For your lemonade stand, this could mean the amount of lemonade you are able to make depends on how many friends are helping you and how much money you, or your parents, have to keep your stand operating.

Aggregate demand is the opposite of aggregate supply in that it is the total demand for goods and services in an economy during a specific period of time. This is all the cups of lemonade the neighbors want during a specified time. Aggregate demand is often affected when there is a change in price level. What I mean is if there is a decline in the price level in an economy, aggregate demand will increase. This is because consumers will have more money left over to make more purchases. On the other hand, if there is an increase in the price level, aggregate demand will ultimately decrease. This happens because higher prices mean less money left over to buy more goods.

In terms of your lemonade stand, if the price decreases, more neighbors might buy more cups, increasing demand. However, if the price of your lemonade increases, your neighbors might not be able to afford to buy more cups of lemonade, which decreases demand.

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