Equilibrium AD-AS Model

Definition

The Equilibrium AD-AS (Aggregate Demand-Aggregate Supply) model is a graphical representation of the macroeconomy that shows the relationship between aggregate demand and aggregate supply. It helps to analyze how changes in these factors can affect output, price levels, and economic growth.

Analogy

Imagine the economy as a seesaw with two sides - aggregate demand and aggregate supply. When both sides are balanced, it represents equilibrium in the economy. If one side goes up or down, it affects the position of the seesaw and can lead to changes in output and prices.

Related terms

Short-run aggregate equilibrium: This term refers to the point where short-run aggregate supply intersects with aggregate demand, indicating that there is no tendency for output or price level to change.

Quantity of aggregate demanded: It represents the total amount of goods and services that households, businesses, government, and foreign buyers are willing to purchase at a given price level.

Aggregate supply: It refers to the total quantity of goods and services that producers are willing to produce and sell at different price levels.