Question

In: Economics

Even if the "Keynesians" who disputed the Classical theories were correct that an economy didn't automatically...

Even if the "Keynesians" who disputed the Classical theories were correct that an economy didn't automatically adjust at all times, isn't this really only a temporary problem?

If people suddenly want more apple juice, let's say in response to new research that indicates drinking an apple a day is even better than eating one (perhaps you heard about an apple a day keeping the doctor away?), it would take some time to plant and grow more apples, so a shortage could exist for a while, but wouldn't apple production and therefore apple juice production eventually catch up?

Solutions

Expert Solution

Yes the problem is temporary, even the Keynesian economics theory describes that disequilibrium remains in the economy for short run or for some time. In long run, economy always settles up but either with higher/lower prices or quantity reduced/raised. If there is high demand for apple juice, in short run the demand for apple juice will rise, it will cause to shift demand curve to shift right from D to D1, the equilibrium shifts from point A to point B which cause prices to rise from P to P1 and quantity raises from Q to Q1. If prices have risen and the quantity demanded is more than before, producers will for sure raise the production of apple juice to gain more profit from the market. They raise supply only in long run because it is even not possible to raise supply over night. If supply curve shifts from S to S1 in long run, equilibrium shifts from point B to point C which cause prices to rise from P1 to P2 and the quantity reduced from Q1 to Q and come back at its initial level.


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