Question

In: Economics

Explain the concept of short run and give examples. Compare output and prices in the short...

Explain the concept of short run and give examples. Compare output and prices in the short run and in the long run.

Solutions

Expert Solution

For individual firms, it is the time period in which certain factors of production remain fixed while others can vary in quantity. For the economy, it is a time period in which the economy can go out of its long run equilibrium and can remain in a recession or expansion. For example, there is a long run GDP which indicates the maximum potential GDP that the economy can generate in the long run over a period of time. and then there is a short and GDP which is determined by the aggregate demand and short run aggregate supply. this GDP can be greater than or smaller than the potential GDP in the short run but in the long run it has to be equal to the long run potential GDP

the implication is that in the short run changes in the aggregate demand and short run aggregate supply can bring changes in the real GDP. however in the long run only prices are affected and real GDP remains at its full employment level.


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