What is the condition for short run equilibrium in the economy?

The condition for short-run equilibrium in the economy is accurately represented by the idea that output is not equal to potential output. In the short run, the economy can produce at a level that differs from its potential output due to various factors, including fluctuations in aggregate demand and supply.

In this context, potential output represents the level of production that an economy can sustain over the long term without leading to inflation or unemployment that deviates from its natural rate. However, in the short run, actual output can be influenced by temporary factors such as changes in consumer spending, investment levels, fiscal policy, and external shocks. This can lead to situations where the economy operates above or below its potential output.

When actual output is below potential output, it may indicate economic slack, leading to higher unemployment levels. Conversely, if output is above potential output, it could lead to inflationary pressure as resources are over-utilized. Thus, recognizing that output in the short run can deviate from potential output is foundational to understanding business cycles and the dynamics of macroeconomic policies.