Reading an AD-AS Diagram
An aggregate demand–aggregate supply diagram puts two economy-wide measures on one set of axes. Its horizontal coordinate is real output, usually represented by real gross domestic product (real GDP); its vertical coordinate is the aggregate price level. The diagram is useful only if each point is read in the correct order and with the units shown on the axes.
Three curves appear on the standard diagram. Aggregate demand (AD) shows combinations of the price level and real output at which aggregate planned spending equals real output. Short-run aggregate supply (SRAS) shows combinations of the price level and real output that firms are willing and able to produce in the short run. Long-run aggregate supply (LRAS) is drawn vertically at the economy’s long-run level of output, often called potential output. The standard diagram draws AD downward, SRAS upward, and LRAS vertically. The reasons for those shapes are separate questions; here the task is to identify the curves and interpret their locations and intersections.
The model treats the curves as applying to the same economy and time period. A point on AD pairs a price level with the amount of real output demanded; a point on SRAS pairs a price level with the amount of real output supplied. At their intersection, both curves assign the same output to the same price level. That shared coordinate is why the intersection identifies short-run equilibrium.
Axes, Units, and Curve Identity
Before interpreting a curve, inspect both axis labels and their scales. Real output might be measured in billions of chained dollars, trillions of dollars, or an index. The price level might be a price index with a stated base year. Its value is not necessarily a percentage inflation rate or the dollar price of one good. A point written \((8,100)\), for example, means output of 8 units on the horizontal scale and a price-level index of 100 on the vertical scale—not the reverse.
| Diagram element | Standard position or shape | What to read from it |
|---|---|---|
| AD | Downward-sloping curve | Output demanded at each displayed price level |
| SRAS | Upward-sloping curve | Output supplied in the short run at each displayed price level |
| LRAS | Vertical line | The long-run output level, shown by its horizontal coordinate |
| AD-SRAS intersection | A point common to AD and SRAS | Short-run equilibrium output and price level |
A vertical LRAS line has one output coordinate but spans multiple price levels in the diagram. Its horizontal location is the relevant information when comparing output with the AD-SRAS intersection. The line does not say that the price level is fixed at one value. Likewise, the intersection of AD and LRAS alone is not enough to identify short-run equilibrium: SRAS must pass through that same point too.
The notation emphasizes that equality is required at one common price level. It is not enough for AD and SRAS to have the same output at different price levels. If all three curves meet at one point, then short-run equilibrium output also equals the LRAS output level. If AD and SRAS meet to the left or right of LRAS, the short-run equilibrium output differs from the long-run level shown.
Why the Intersection Identifies Equilibrium
The justification follows directly from what the curves represent. At a selected price level \(P\), AD gives the amount of output demanded, while SRAS gives the amount firms supply in the short run. Where the two curves cross, their output coordinates are equal. Thus there is no difference between the diagram’s quantity demanded and quantity supplied at that price level. Away from the crossing, the curves assign different output quantities, so that point cannot simultaneously represent equality of the two.
This is a graphical identification, not a claim that the economy necessarily remains at the point forever or that the diagram alone explains how it got there. It also does not imply that short-run equilibrium must coincide with LRAS. The model’s long-run output benchmark is shown separately by the vertical LRAS line.
Worked Examples
Worked Example: Finding the Equilibrium in a Schedule
A hypothetical economy’s diagram is summarized by the following schedule. Output is measured in trillions of real dollars and the price level is an index. At price levels 120, 110, 100, and 90, respectively, AD indicates output of 6, 7, 8, and 9. At those same price levels, SRAS indicates output of 10, 9, 8, and 7. LRAS is located at output 8. Find the short-run equilibrium and determine whether its output matches the LRAS level.
Method. Compare AD and SRAS at each common price level; the equilibrium is where their output values agree. At price level 120, demanded output is 6 and supplied output is 10, so the curves do not meet there. At 110, the values are 7 and 9. At 100, both equal 8. At 90, the values are 9 and 7.
Therefore, the AD-SRAS intersection is \((Y,P)=(8,100)\): output is 8 trillion real dollars and the price-level index is 100. The LRAS line is at \(Y=8\), so its horizontal coordinate matches the equilibrium output. All three curves meet at this output and price-level coordinate in the schedule.
Check. Substituting the intersection’s price level, 100, into the schedule gives \(Y_{\mathrm{AD}}=8\) and \(Y_{\mathrm{SRAS}}=8\), confirming equality. The common mistake is to report \((100,8)\), reversing the axes. The correction is to write output first and price level second: \((8,100)\).
Worked Example: Reading Between Axis Ticks
A hypothetical diagram has real GDP, in billions of chained dollars, on its horizontal axis, with labeled ticks at 600, 700, 800, and 900. The vertical axis is a price index, with labeled ticks at 100, 104, 108, and 112. The AD and SRAS curves cross halfway between the 700 and 800 output ticks and halfway between the 104 and 108 price-index ticks. LRAS is drawn at output 800. Read the short-run equilibrium and compare its output with LRAS.
Method. Interpolate using the positions between labeled ticks. Halfway from 700 to 800 is \(700+(800-700)/2=750\) billion. Halfway from 104 to 108 is \(104+(108-104)/2=106\). The intersection is therefore \((Y,P)=(750,106)\), with output in billions of chained dollars and the price level recorded as an index.
LRAS is at \(Y=800\) billion. The short-run equilibrium output is \(800-750=50\) billion below that marked level, so the AD-SRAS intersection lies to the left of LRAS. This comparison uses horizontal coordinates only; it does not compare the price-index value with output.
Check. The reported price index, 106, lies midway between 104 and 108, and the reported output, 750, lies midway between 700 and 800. A common mistake is to read the vertical value as 106 percent inflation. It is a price-level index value in this diagram, not an inflation rate. Another is to treat each tick interval as one unit rather than using the axis labels.
Worked Example: Distinguishing a Two-Curve Crossing From a Three-Curve Meeting
In a hypothetical diagram, the AD-SRAS intersection is at output 9.2 and price index 108. LRAS is vertical at output 8.8. At price index 111, AD passes through output 8.8, while SRAS passes through output 9.5. Identify the short-run equilibrium, state whether it coincides with the LRAS level, and assess whether the AD-LRAS crossing at price index 111 is short-run equilibrium.
Method. First use the AD-SRAS intersection, not the AD-LRAS crossing, to identify short-run equilibrium. Its coordinate is \((9.2,108)\). The LRAS output coordinate is \(8.8\), so the short-run equilibrium output exceeds the long-run output level shown by \(9.2-8.8=0.4\) output units. The intersection does not coincide with LRAS.
At price index 111, the AD curve and LRAS share the coordinate \((8.8,111)\). But SRAS at that price level indicates output 9.5, not 8.8. Thus the equality condition fails: \(Y_{\mathrm{AD}}=8.8\), whereas \(Y_{\mathrm{SRAS}}=9.5\). The AD-LRAS crossing is not the short-run equilibrium.
Check. At \((9.2,108)\), AD and SRAS share both coordinates, so that is the required short-run equilibrium. The common mistake is to call \((8.8,111)\) equilibrium because two curves cross there. The correction is to check all curves required by the claim: for short-run equilibrium, AD and SRAS must cross at the same point.
Common Reading Errors and Why the Diagram Matters
The diagram organizes two macroeconomic outcomes in one picture: an economy-wide output quantity and an economy-wide price level. For a reader comparing a described equilibrium with the model’s long-run output benchmark, the horizontal location of LRAS makes it possible to see whether the short-run intersection is at, below, or above that benchmark. The vertical coordinate of the AD-SRAS crossing gives the corresponding price level. These are distinct comparisons; a price index cannot be compared directly with an output quantity.
- Reversing the coordinate order. Write \((Y,P)\): real output first, aggregate price level second.
- Ignoring axis units. An output value of 750 may mean billions of chained dollars, not 750 dollars or 750 units of goods.
- Calling the price index an inflation rate. A price-level index describes a level; an inflation rate describes a change in that level over time.
- Using the wrong intersection. The standard short-run equilibrium is where AD and SRAS meet, not where AD meets LRAS alone.
- Treating LRAS as a price-level line. LRAS is vertical because it marks an output coordinate; its price-level coordinate is not fixed by the vertical line.
- Assuming all three curves must meet. AD and SRAS can intersect at an output different from the location of LRAS.
Check Your Understanding
For each original problem, use the axis labels and curve identities carefully. Answers are provided at the end of each question.
- A diagram measures real output in hundreds of billions of dollars and the price level as an index. AD and SRAS cross at horizontal coordinate 6.4 and vertical coordinate 107. LRAS is at horizontal coordinate 6.4. Give the ordered pair with units and state whether short-run output matches LRAS. (Answer: \((6.4,107)\); output is 6.4 hundred billion dollars and matches LRAS.)
- Output-axis ticks are 200, 300, and 400; price-index ticks are 90, 100, and 110. AD and SRAS cross one-quarter of the way from 300 to 400 and three-quarters of the way from 90 to 100. Read the equilibrium coordinate. (Answer: \((325,97.5)\).)
- At price index 102, AD indicates output 5.6 and SRAS indicates output 5.6. LRAS is at output 6.1. What is the short-run equilibrium coordinate, and how does its output compare with LRAS? (Answer: The equilibrium is \((5.6,102)\); its output is 0.5 units below LRAS.)
- AD crosses LRAS at \((7.0,104)\). At price index 104, SRAS indicates output 7.4. AD and SRAS instead cross at \((7.3,106)\). Which point is short-run equilibrium, and do all three curves meet there? (Answer: \((7.3,106)\) is short-run equilibrium; no, LRAS is at output 7.0.)
- A chart labels output in trillions of real dollars and the price level as an index. The AD-SRAS intersection is at output 4.8 and index 99; LRAS is at output 5.0. A report describes the point as “price level 4.8, output 99.” Correct the report and state the output comparison. (Answer: Price-level index 99 and real output 4.8 trillion dollars; output is 0.2 trillion dollars below LRAS.)