Self-adjust

Definition

Self-adjust refers to the ability of an economy to return to its long-run equilibrium after experiencing a disturbance or shock. This concept highlights how prices, wages, and other economic variables can adjust over time, allowing the economy to stabilize itself without external intervention. In the long run, the self-adjust mechanism operates through changes in aggregate supply and demand, influencing overall economic output and employment levels.

5 Must Know Facts For Your Next Test

1. Self-adjustment mechanisms work through changes in wages and prices, which can be sticky in the short term but adjust in the long run.
2. If an economy experiences a negative demand shock, such as a recession, self-adjustment can lead to lower prices and wages, eventually restoring equilibrium.
3. In contrast, a positive demand shock can lead to increased prices and wages, encouraging higher production until the economy returns to full employment.
4. The self-adjust process assumes that markets are competitive, allowing for flexible prices and wages that help eliminate shortages or surpluses over time.
5. This concept is critical for understanding how economies can recover from shocks without needing government intervention or policy changes.

Review Questions

• How does the self-adjust process influence the economy after a negative demand shock?
  • After a negative demand shock, the self-adjust process leads to falling prices and wages as businesses try to stimulate demand. This adjustment helps restore equilibrium by making goods and services more affordable, which can eventually boost consumption and investment. As these changes take effect, businesses may begin hiring again, reducing unemployment and moving the economy back toward its long-run potential output.
• Analyze the role of aggregate supply in the self-adjustment mechanism of an economy.
  • Aggregate supply plays a critical role in the self-adjustment mechanism by determining how much output the economy can produce at various price levels. When aggregate supply shifts due to factors like changes in resource availability or production costs, it influences overall economic performance. The interaction between aggregate demand and aggregate supply will ultimately dictate how effectively an economy can self-adjust back to equilibrium after disruptions.
• Evaluate the effectiveness of self-adjustment mechanisms in modern economies compared to historical contexts.
  • In modern economies, self-adjustment mechanisms can be less effective than in historical contexts due to factors like government intervention, monetary policy, and global trade influences. While historical economies often relied solely on market forces to achieve equilibrium, today's economies face challenges such as sticky wages and prices that can prolong periods of instability. Evaluating these differences helps illustrate why some economists advocate for active policy measures rather than relying on self-adjustment alone for economic recovery.

Related terms

Long-run Aggregate Supply (LRAS): A vertical line on the aggregate supply and demand graph that represents the total production of goods and services in an economy at full employment, unaffected by price levels.

Aggregate Demand (AD): The total quantity of goods and services demanded across all levels of the economy at a given price level over a specific time period.

Full Employment:

A situation in which all available labor resources are being used in the most efficient way possible, where unemployment is at its natural rate.