Question

What happens if an economy operates at a short-run equilibrium output that exceeds its long-run capacity,

Answer 1

Answer:

There would be an increase in the price of resources for production

Explanation:

When an economy decides to operate at a short-run equilibrium output the cost of obtaining resources for production of goods and services would increase. and this increase in price of resource will cause the short run aggregate supply curve ( SRAS )to shift to the left.

The short run aggregate supply is the total goods and service produced in an economy at different prices while some of the resources used for the production of the goods and services are fixed

Answer 2

Answer:

inflationary pressures will increase the price of the factors of production, causing a shift in the SRAS curve until a new equilibrium is reached.

Explanation:

When an economy is operating at a short run equilibrium output that exceeds its long run capacity, it means it is producing above full employment level. In this situation, the real GDP will be higher than usual, and that will increase aggregate demand. The increase in aggregate demand will create  inflationary pressures on the aggregate supply since the economy is already operating beyond its long run capacity.

As the aggregate demand increases, and the aggregate supply cannot keep up, shortages will occur, and when shortages occur, the equilibrium price will increase. This will lead to higher prices in all factors of production (land, labor and capital) until output decreases and equilibrium is reached.

E.g. when shale gas was discovered in North Dakota, huge companies started flooding very small towns that weren't necessarily rich or had many industries. That excess demand for resources increased the price of everything in those towns, e.g. the price of land and houses skyrocketed and average wages increased dramatically.