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Equilibrium real output and AD/AS shifts

Edexcel IAL Economics · WEC12 Macroeconomic performance and policy

National output settles where aggregate demand equals aggregate supply. Shifts in either curve move the equilibrium, changing the price level, output and employment.

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Equilibrium

Equilibrium real national output is where AD = AS: the total output firms want to supply at the price level equals the total planned spending. Below it, demand exceeds supply, stocks run down and firms raise output and prices; above it, unsold stocks build up and firms cut output and prices.

Shifts in AD

AD right: higher price level and higher real output (more employment), with more inflation the closer the economy is to full capacity.
AD left: lower price level (or lower inflation) and lower real output, with higher unemployment.

Shifts in AS

SRAS left (higher costs): higher price level, lower output (stagflation risk).
SRAS or LRAS right (lower costs or more capacity): lower price level and higher output.
If AD and LRAS both shift right by similar amounts, output grows without inflation: the ideal of sustainable growth.

Diagram technique

Always label the axes (price level, real output or real GDP), the curves (AD1, AD2, SRAS), the original and new equilibria (P1, Y1 and P2, Y2). Then explain in words what each shift means for the economy in the question. In the exam, a correctly labelled 'draw' diagram earns most of the marks.

Worked example

A central bank cuts interest rates while world oil prices rise. Analyse the likely effects on the price level and real output.

Lower interest rates raise C and I, so AD shifts right.
Higher oil prices raise costs, so SRAS shifts left.
Both push the price level up, so it definitely rises.
AD right raises output but SRAS left lowers it, so the effect on real output depends on the relative size of the shifts.

Answer: The price level rises; the change in real output is uncertain.

Key idea: Equilibrium where AD = AS. AD right: P and Y up. SRAS left: P up, Y down. AS right: P down, Y up. Two shifts at once: one variable certain, the other depends on sizes.

Check yourself

A fall in consumer confidence shifts AD left. The most likely effects are
- a lower price level and lower real output
- a higher price level and lower real output
- a lower price level and higher real output
- a higher price level and higher real output
Show answer
a lower price level and lower real output. Move down along SRAS.
AD shifts right and SRAS shifts right at the same time. What is certain?
- The price level rises
- The price level falls
- Real output rises
- Real output falls
Show answer
Real output rises. Each shift raises output, so output rises; the price level effect depends on the sizes.
Which combination is most likely to produce stagflation (rising prices and falling output)?
- SRAS shifts left with AD unchanged
- AD shifts right with SRAS unchanged
- LRAS shifts right
- AD shifts left with SRAS unchanged
Show answer
SRAS shifts left with AD unchanged. Cost-push: P up and Y down.
At the current price level, AD exceeds AS. What happens next?
- Stocks build up and firms cut prices
- Nothing changes
- AD shifts left automatically
- Stocks fall and firms raise output and prices
Show answer
Stocks fall and firms raise output and prices. Excess demand pushes output and prices up towards equilibrium.
Which combination gives growth in real output with little inflation?
- AD shifts right with LRAS fixed at full capacity
- AD and LRAS each shift right by similar amounts
- SRAS shifts left
- AD shifts left
Show answer
AD and LRAS each shift right by similar amounts. Demand grows in line with capacity.
An economy suffers a fall in exports because of a global recession. Explain, using AD/AS, the effect on real output and the price level.
Show answer
Lower exports reduce X - M, so AD shifts left; the price level falls (or inflation slows) and real output falls, raising unemployment.. X falls, AD left, P and Y fall.
AD increases by $40 bn at each price level. Because of the slope of SRAS, real output rises by only $25 bn. By how much is the rise in output smaller than the shift, in $ bn?
Show answer
$15 bn. 40 - 25 = $15 bn of the extra demand is absorbed by a higher price level.

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Sources

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2 (June 2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.