Principles of Macroeconomics / Unit 8 MAC 0711 worked example, 60 to 90 seconds
Finding Equilibrium from a Schedule
The idea
Given a table of price levels with the quantity demanded and the quantity supplied beside each, work down the rows and compare the two quantities. Where demand exceeds supply, the price level is below equilibrium. Where supply exceeds demand, it is above. Where they are equal you have found the equilibrium price level and the equilibrium real GDP. Then ask where that output sits against potential, because that is what tells you whether unemployment or inflation is the greater risk there.
In practice
Worked example: at a price level of one hundred and twenty, output demanded is seven hundred and output supplied is six hundred and forty. At one hundred and thirty, both are six hundred and eighty, so that is equilibrium. At one hundred and forty, supply is seven hundred and ten against demand of six hundred and sixty. If potential GDP is eight hundred, this economy is well below it.
Where people slip
Equilibrium does not mean healthy. An economy can settle at an equilibrium far below potential with high unemployment and stay there, which is exactly the situation the rest of the course is about.
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