Long-term macroeconomics studies aggregate demand and supply, which can increase production and inflation. Free market economies balance supply and demand to determine prices. Economic growth can lead to inflation, but increased employee wages can offset it. Business cycles drive long-term macroeconomics, with peaks indicating little growth and contractions leading to destructive capitalism.
Macroeconomic studies define short-term and long-term activities. Long-run macroeconomics looks at the aggregate demand and supply of a large number of various economic activities. These items can include production, consumer demand, employment levels and inflation, among other items. In short, long-term macroeconomics increases production to meet full employment, which also tends to increase inflation. Several months or years may be the long term period, although this is not defined in many cases.
In free market economies, companies determine the quantity of supply of goods in the market. The balance between supply and demand represents the point at which total supply meets total demand, creating an acceptable price for goods and services. In the longer-term macroeconomy, supply may slowly increase as companies hire more workers. This leads to full employment in the economy as more workers are needed to produce more goods or services. Full employment may include a small percentage of unemployed workers, such as four or five percent.
Increases in supply require the use of more resources, such as direct materials or facilities to produce goods. In long-term 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 can be offset by increased employee wages. These salary increases occur when companies require more employees or more qualified employees to increase production.
In some cases, the supply curve can shift to the left in long-run macroeconomics. This is due to the higher production created by more companies entering the market. For example, successful economies will attract more companies to the market, mainly from foreign investors. If no shift in the demand curve occurs, greater supply will result for goods and services. While this could result in a glut of unpurchased product, prices could fall as companies try to reduce inventories, limiting inflation spikes.
Business cycles are often the driving force of long-term macroeconomics. The stage where there is a strong balance of supply and demand can represent a peak in the business cycle. The peak can indicate a point where little or no major growth is taking place in the economy, even though the economy is functioning well. At some point, the economy may enter a period of contraction. The result is destructive capitalism, where inefficient companies disappear and only the strong survive, with new companies possibly entering the market to consume the weaker companies.
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