Definition: Total quantity of goods and services produced in an economy over a particular period of time. In macroeconomics, short run and long run mean different things than Microeconomics.

Short run

The short run means the period of time where prices levels are constant. Wages are especially influential, and they rarely fluctuate in the short term due to Labour market rigidities.

Determinants

Changes in..

• Resource prices (wage + non-labour resources)
• Taxes or subsidies
• Supply Shock

Equilibrium

The same as microeconoimcs, price levels on y axis and real gdp on x axis.

Long run

The long run means the period of time where prices of resources can change. The Long run Aggregate supply curve is vertical, for a very simple reason. Since the price levels adapt and match output price changes. There is no reason to change since all real costs are the same. Supply side changes are often temporary, and demand side changes are automatically adjusted.

Determinants

It comes as no surprise the factors that shape the Long run aggregate supply are those that influence the real costs.

• Quantities of factors of production
• Quality of factor production
• Improvements in technology, efficiency
• Institutional changes

Depending on where the short run equilibrium lies in respect to the long run, there exists the three states on the Business Cycle. Inflationary, deflationary, and at potential output.

There is automatic adjustment. This is a monetarist view. Changes in aggregate demand can will be matched by changes in short term aggregate supply, going back to the Long run aggregate supply. The cause is just changes in prices of wages change to match changes in price levels.

Now, there is the Keynesian view. On the idea that wages do not fall easily, so equilibrium can be stuck in the short run, unable to move to the long run. Essentially, there will be no long run since the supply curve is not influenced by price changes due to Labour market rigidities.

Implications of both models

Government intervention

The Keynesian model believes in the persistence of deflationary gaps over long periods of time. It supports government intervention in economy to come out of deflationary gaps. Contrarily, monetarists believe that governments should try to make markets work as freely as possible, so wages and product prices can respond to the forces of demand and supply.

Changes in aggregate demand

Keynesian believes it does not necessarily mean increases in price levels. Monetarists believe this is always true.