Ing Comercial

macroeconomic equilibrium

Microeconomics Is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources .Typically, it applies to markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, whichdetermines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.
Definition of Equilibrium
Definition: Equilibrium is some balance that can occur in a model, which can represent a prediction if the model has a real-world analogue. The standard case is the price-quantity balance found in a supply and demand model. If the term is not otherwisequalified it often refers to the supply and demand balance. But there also exist Nash equilibria in games, search equilibria in search models, and so forth

Introduction
Macroeconomic equilibrium for an economy in the short run is established when aggregate demand intersects with short-run aggregate supply. This is shown in the diagram below

At the price level Pe, the aggregate demand for goodsand services is equal to the aggregate supply of output.  The output and the general price level in the economy will tend to adjust towards this equilibrium position.
If the price level is too high, there will be an excess supply of output. If the price level is below equilibrium, there will be excess demand in the short run. In both situations there should be a process taking the economytowards the equilibrium level of output.
There may be occasions when in the short run, the economy cannot meet an increase in demand. This is more likely to occur when an economy reaches full-employment of factor resources. In this situation, the aggregate supply curve in the short run becomes increasingly inelastic.
Equilibrium Analysis
Supply and Demand Curves
1. The markets for two goods arelinked if the two items are “related” (substitutes or complements) or if one of them is an input into the production of the other. When markets are linked, a shift in the supply or demand curve in one market has consequences for the price and output in the second market. Thus, when policymakers consider intervention in one market (e.g. a tax or regulation), they should try to think about the effectsin other markets as well.

2. Suppose that the commodities X and Y are related, and there is a shift in either the supply or demand curve of commodity X. A partial equilibrium analysis of the effect of the shift may be in error because of feedback effects from the market of Y. For example, if a tax raises the price of beer, then the demand for wine may increase (since it is a substitute), butthis increase in demand causes the price of wine to increase, which in turn shifts the demand of beer up, and so on. Ultimately, the economy settles to a new general equilibrium.

Changes in Market Demand and Equilibrium Price
The demand curve may shift to the right (increase) for several reasons:
1. A rise in the price of a substitute or a fall in the price of a complement
2. An increasein consumers’ income or their wealth
3. Changing consumer tastes and preferences in favour of the product
4. A fall in interest rates (i.e. borrowing rates on bank loans or mortgage interest rates)
5. A general rise in consumer confidence and optimism
The outward shift in the demand curve causes a movement (expansion) along the supply curve and a rise in the equilibrium price andquantity.  Firms in the market will sell more at a higher price and therefore receive more in total revenue.
The reverse effects will occur when there is an inward shift of demand. A shift in the demand curve does not cause a shift in the supply curve!  Demand and supply factors are assumed to be independent of each other although some economists claim this assumption is no longer valid!
Changes...