Short-Run Equilibrium

Importantly, the point where the SRAS and AD curves intersect is the short-run equilibrium. If this point also lies on the LRAS curve (so the SRAS, AD, and LRAS curves all intersect at the same point), it is also the long-run equilibrium. The economy naturally adjusts to the long-run equilibrium in the long-run.

For example, if aggregate demand increases, the economy is placed in a new short-run equilibrium with a higher quantity and higher price levels. The higher price levels place an upward pressure on wages; as workers demand higher wages, input costs increase, making each unit of output less profitable and shifting the supply curve to the left until the new short-run equilibrium is also a long-run equilibrium. This places the economy at a new long-run equilibrium, as shown in the image below, at a higher price level but the same quantity as the initial long-run equilibrium.