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In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy. This stands in contrast to the short...
In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints and markets are not fully in equilibrium.
We begin with a discussion of long-run macroeconomic equilibrium, because this type of equilibrium allows us to see the macroeconomy after full market adjustment has been achieved. In contrast, in the short run, price or wage stickiness is an obstacle to full adjustment.
Long-run equilibrium is a state in the economy where all markets have reached a point of balance, with no incentive for producers or consumers to change their behavior. It represents a stable, long-term condition where the aggregate supply and demand curves have fully adjusted to reach an equilibrium price and quantity.
In long-run equilibrium, firms achieve a situation where they produce at the lowest point of their average total cost curve. The entry of new firms in a perfectly competitive market continues until economic profits are eliminated, leading to zero economic profit in the long run.
In long-run equilibrium, the economy reaches a point where actual output equals potential output, signifying efficient use of resources. The adjustment process to long-run equilibrium can involve shifts in aggregate demand or aggregate supply due to changes in consumer behavior or external factors.
Explain and illustrate what is meant by equilibrium in the short run and relate the equilibrium to potential output. In macroeconomics, we seek to understand two types of equilibria, one corresponding to the short run and the other corresponding to the long run.
The short run refers to what happens while some variables (such as prices, wages, or capital stock) are held constant (taken to be exogenous). The long run refers to what happens when these variables are allowed to vary and be determined by the model (they become endogenous).
In macroeconomics, the short run is generally defined as the time horizon over which the wages and prices of other inputs to production are "sticky," or inflexible, and the long run is defined as the period of time over which these input prices have time to adjust.
The long run competitive equilibrium when every firm's long run average cost curve is the same, given by LAC Y, is characterized by a price p *, an output y * for each firm, and a number n * of firms such that. p * is the minimum of LAC n * y * y * is the minimizer of LAC n * y * Qd (p *) = n * y *.