AD/AS Equilibrium and Macroeconomic Shocks

The AD/AS model is the central analytical framework for macroeconomics at A-Level. It brings together aggregate demand and aggregate supply to determine the equilibrium price level and level of real output in the economy. This lesson examines how equilibrium is established, how demand-side and supply-side shocks disrupt it, and how the economy adjusts — with detailed reference to real-world examples including the 2008 financial crisis, the COVID-19 pandemic, and the energy price shock of 2022.

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Establishing Macroeconomic Equilibrium

Macroeconomic equilibrium occurs where the AD curve intersects the AS curve. At this point:

• The quantity of goods and services demanded equals the quantity supplied
• There is no tendency for the price level or real output to change (in the absence of external shocks)
• The price level and level of real GDP are simultaneously determined

Equilibrium in the Classical Model

In the classical model:

• Short-run equilibrium occurs where AD intersects SRAS
• Long-run equilibrium occurs where AD intersects SRAS intersects LRAS (all three curves meet)
• If the economy is not at long-run equilibrium, wages and prices adjust until it returns to LRAS