4.3.11—AD/AS equilibrium

In the AD/AS model, equilibrium occurs where planned aggregate expenditure equals firms’ aggregate supply at a given price level. The intersection determines real output and the average price level; employment is related through production.

If AD exceeds AS at the current price, firms see unintended stock falls and may increase output; if AS exceeds AD, inventories rise and output pressure weakens.

The intersection of AD and SRAS gives short-run output and price level; compare it with LRAS to judge whether output is above or below sustainable capacity.

Equilibrium output is not automatically full-employment output or a socially optimal price level.