The AD-AS model depicts the interaction between aggregate demand (AD) and aggregate supply (AS) in a market economy. At equilibrium, AD and AS converge, meaning...
The AD-AS model depicts the interaction between aggregate demand (AD) and aggregate supply (AS) in a market economy. At equilibrium, AD and AS converge, meaning that the quantity of goods demanded is equal to the quantity of goods supplied at that particular price level. This equilibrium price is known as the equilibrium price, and it represents the market clearing price.
When AD exceeds AS, it leads to lower prices as consumers and producers agree to lower prices to clear the excess supply. Conversely, when AS exceeds AD, it leads to higher prices as producers and consumers agree to raise prices to clear the excess demand. Equilibrium price is reached when AD = AS, resulting in a stable price and quantity level in the economy.
Examples of equilibrium price and quantity are as follows:
If the equilibrium price is $10 and the equilibrium quantity is 100 units, it means that at this price, there is a perfect match between buyers and sellers, and no further transactions are taking place.
If the equilibrium price is $15 and the equilibrium quantity is 150 units, it means that the market is in equilibrium, with no excess supply or demand.
Equilibrium price and quantity are essential concepts in the AD-AS model as they help determine the equilibrium price level and ensure a stable and efficient allocation of resources in the economy