Economics for Business Microeconomics Deals Economy

Question: Describe about the Economics for Business of Microeconomics Deals Economy. Answer: Introduction Macroeconomics deals with the performance of the economy in the short and long run adhered to the macroeconomic variables prevailing in the country. It helps in analysing the complexities and the method in which the country works (Mankiw, 2014). It deals with the production of all the goods and services in the economy that thereby considers the national market of the country. This essay explores the short run and the long run equilibrium in the economy, where it analyses the short run equilibrium and the challenges that are explored in the short run. Along with that, the long run equilibrium of the economy set by the principles and theories are stated where the government plays a major function in attaining the equilibrium. The essay helps in analysing the reason for the stable economy to operate at an output level where the aggregate demand curve, long run and the short run aggregate supply curve intersect. This study has been divided into further subdivisions that would analyse the objectives of the essay in a orderly manner. The essay at first depicts the aggregate demand curve, short run supply curve and the long run supply curve. Following the definition of the three, it analyses the short run equilibrium, government intervention in the economy followed by the long run equilibrium. Aggregate Demand Curve, Short Run Aggregate Supply Curve and Long Run Aggregate Supply Curve Aggregate demand curve of an economy consists of the consumption expenditure, planned investment, government purchases and net exports. It is a downward sloping curve which could be written as Y= C+I+G+NX (Stock Watson, 2016). The shift in the aggregate demand curve could be a result from change in the autonomous monetary policy, government purchases, taxes, net exports and consumption expenditure. Short run aggregate supply curve consists of three aspects, expected inflation, output gap and inflation shock. The supply curve is a positively sloped curve, where the slope of the curve depends upon how fast the prices respond about the variations in the output gap (Buiter, 2014). Long Run Aggregate Supply curve is determined by the amount of capital and labour used in manufacture along with the accessibility of technology usage in the production process. The natural rate of output is vertical which is generated by the natural rate of unemployment. Equilibrium in the short run In the short run term of an economy, equilibrium is achieved when the aggregate demand curve intersects the aggregate supply curve. The economy consists of three markets, namely, labour market, financial market and product market (Benigno, Ricci, Surico, 2015). It is quite vital for an economy to achieve equilibrium in all these three markets, that would help the economy to flourish. Availabilities of various fluctuations are noticed in the aggregate demand and aggregate supply model faced by an economy. This would be shown with the help of the following figure : Figure 1: Short Run Equilibrium (Source: As Created By the Author) In figure 1, initial aggregate demand and supply curves were AD and AS1, and equilibrium occurs at point E1. The equilibrium price level is P1 and Y1 corresponding to that equilibrium point. Sudden supply shocks are experienced in the economy, which causes a rightward shift of the supply curve. The increase in supply results from the shift of the supply curve from S1 to S2. Corresponding to the new equilibrium, the new price level is achieved at P2 and output level at Y2. Hence, it could be seen that there is a fall in the price level of the economy and a rise in the output level. In the short run, not all the factors of production are variable in nature. At least one of the factors are considered to be fixed. Hence, it could be stated that the economy may or may not be able to achieve the stability in the market after the supply shock that has been experienced. Government intervention In order to bring stability in the short run of the economy, government plays a vital role in imputing certain measurable changes that could bring the situation under control. Government exercises various expansionary and contractionary fiscal measures depending upon the situation (Scarth, 2014). In order to reduce the output in the market, the government employees certain contractionary measures, whereas, in order to overcome the deficit in output, the government undertakes expansionary measures in the economy. These measures help in restabilising the current state of the economy. The government can impute changes in the level of taxation, employment level, inflationary measures and other economical aspects, thereby accessing the equilibrium position of the markets. Long run equilibrium The Long Run Supply Curve faced by an economy is vertical, and it is quite important for the economy to choose a point of economys equilibrium where the aggregate demand curve, short run aggregate supply curve and the long run aggregate supply curve intersect. Figure 2: Long Run Equilibrium (Source: As Created by the Author) In the following figure, at first equilibrium occurs when AD1, AS1 and LRAS intersect. At that point, the short run equilibrium is in accordance with the long run equilibrium output, Q. With the change in some fiscal policy measures, there is an decrease of the aggregate demand curve from AD1 to AD2. This would shift the equilibrium point away from the long run equilibrium achieved earlier. There would be a rise in the price level along with the rise in the output. This would be considered as the new short run equilibrium in the economy (Weeks, 2013). Yet, as the economy further moves towards the long run, the expected price level of the economy would come in accordance with the actual price level of the firms, producers and workers. This would correspondingly shift the AS curve from AS1 to AS2. This would thereby shift the equilibrium position back in alignment with the long run equilibrium. Hence, it could be stated that during the short run in the economy, changes has been noticed both in the price level and the output level whereas, in the long run, changes are considered only in the price level and output remains the same. The contractionary measures affect the equilibrium exactly the opposite, yet, it manages to return back to the long run equilibrium level (Goodwin, Nelson, Harris, Torras, Roach, 2013). Hence, it could be stated from the above analysis that in order to attain stability in the economy, the aggregate demand curve, short run aggregate supply curve and the long run aggregate supply curve must intersect at the same point. Conclusion This study has provided the scope of analysing the mechanism and the process of how the economy manages to attain the equilibrium level of output amidst all the external and internal shocks prevailing within the economy. It is seen that these shocks affect the short run equilibrium level of the economy, yet, with the movement of the economy towards the long run, the stability is easily achieved. This stability brings changes in the price level yet; the output level remains the same. Government intervention in the short run time period of the economy helps in restoring the discrepancies that erupts. They utilize various fiscal measures in oirder to help the country to gain over such extreme situations. It provides the nation with the initiative of maintaining the demand and supply stability in the economy thereby, reducing unemployment and inflation. Relatively, the long run situation is achieved which enforces the stability of the country. Reference Benigno, P., Ricci, L. A., Surico, P. (2015). Unemployment and productivity in the long run: the role of macroeconomic volatility. Review of Economics and Statistics, 97(3), 698-709. Buiter, W. H. (2014). Temporary Equilibrium and Long-Run Equilibrium (Routledge Revivals). Routledge. Goodwin, N., Nelson, J., Harris, J., Torras, M., Roach, B. (2013). Macroeconomics in context. . ME Sharpe. Mankiw, N. G. (2014). Principles of macroeconomics. . Cengage Learning. Scarth, W. (2014). Macroeconomics. Books. Stock, J. H., Watson, M. W. (2016). Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics. Handbook of Macroeconomics, 2, 415-525. Weeks, J. (2013). Book Review: A Modern Guide to Keynesian Macroeconomics and Economic Policies. Review of Radical Political Economics, 45(2), 240-242.