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What Is Long-Run Macroeconomics?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 14 November 2016
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Macroeconomic studies define both short-run and long-run activities. Long-run macroeconomics looks at the aggregate demand and supply for a large number of various economic activities. These items can include production output, consumer demand, employment levels, and inflation, among other items. In short, long-run macroeconomics increase output to meet full employment, which also tends to increase inflation. Several months or years may be the long-run period, though this has no set definition in many cases.

In free market economies, companies determine the amount of supply of goods in the market. Supply and demand equilibrium represents the point at which total supply meets total demand, creating an acceptable price point for goods and services. In long-run macroeconomics, supply may inch up slowly as companies hire more employees. This leads to full employment in the economy as more workers are necessary to produce more goods or services. Full employment may include a small percentage of unemployed workers, such as four or five percent.

Increases to supply require the use of more resources, such as direct materials or facilities to produce goods. In long-run macroeconomics, economic growth can lead to inflation, classically defined as too many dollars chasing too few goods. Natural inflation due to this growth is not necessarily bad. Higher prices for goods and services may be offset by increased wages for employees. These wage increases come as companies require more employees or better-skilled employees to increase production outputs.

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In some cases, the supply curve may shift to the left in long-run macroeconomics. This occurs due to the higher output created by more companies entering the market. For example, successful economies will draw more companies into the market, particularly from foreign investment. If no shifts in the demand curve occur, higher supply is the result for goods and services. Though this may result in a glut of unpurchased products, prices may go down as companies attempt to reduce inventories, limiting inflation increases.

Business cycles are often the driving force in long-run macroeconomics. The stage where strong supply and demand equilibrium exists can represent a business cycle peak. The peak can indicate a point where little or no major growth occurs in the economy, though the economy is running well. At some point, the economy may enter a contraction period. The result is destructive capitalism, where inefficient businesses go away and only the strong survive, with new companies possibly entering the market to consume the weaker businesses.

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