The equilibrium between aggregate demand and aggregate supply. Where the aggregate supply curve and the aggregate demand curve intersect, this is our equilibrium point. We see this is the quantity equilibrium and this is the price level equilibrium. When we see a shift in the aggregate demand curve, but aggregate supply stays the same, it creates a new quantity and a new price level. Because of an increase in both and output, suppliers will need to hire more workers. Thus, when the aggregate demand curve shifts to the right, there is an increase in employment.
If the aggregate demand curve shifts to the left while the supply curve remains the same, we once again create new quantity and new price level. Because there is a drop in quantity and a drop in price, suppliers will need to have fewer workers. Therefore, when the aggregate demand curve shifts to the left, we see decrease in employment.
If there is an increase in aggregate supply while aggregate demand stays the same, price level will decrease. Still, there is more quantity needed. Therefore, new workers will need to be hired and employment will increase.
If the aggregate supply decreases, with aggregate demand staying the same, it causes a shift to the left. We see that the price level and the quantity change as well because fewer products are being made when there is a shift to the left of the aggregate supply curve, fever workers are needed and therefore employment decrease.
Now time to introduce the long run supply curve. This curve is a vertical line that represents full employment of resources. When the economy is at equilibrium the aggregate supply and aggregate demand curve intersect over the LRAS curve, like in this graph. To show graphically what a recession looks like we draw the short run equilibrium to the left of full employment. In this situation the output in the economy has decreased. With a decrease in output, businesses don't need as many workers, so unemployment increases. With the decrease in employment and the economic activity, the price level in the economy will tend to be lower. This situation is represented with this graph.
To show graphically what inflation in an economy looks like, we draw the short run equilibrium to the right of full employment. In this situation the output in the economy has increased with an increase in output businesses have to pay more workers and resources since both are in short supply.in this situation price lever, output and employment all increase. Just like the supply curve, an increase in the LRAS for our country is a great shift of that curve to the right. Just like a demand curve, a decrease in the LRAS curve is a shift to the left.
