Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Assumptions About Long-Term Equilibrium The assumption of long-run equilibrium in the economy refers to the belief that the economy will return to long-run equilibrium after being exposed to temporary disturbances or changes. In long-run equilibrium, the economy operates at its potential level of output, at which the natural rate of unemployment is reached and prices and wages move freely. This assumption is based on the idea that, in the long run, the market will adjust itself and reach an equilibrium without outside interference. In this environment, prices and wages will adjust to reach an equilibrium level appropriate to long-run supply and demand. However, in the short run, markets do not always reach equilibrium due to external disturbances such as changes in government policies, changes in technology, and changes in the business climate. Therefore, in the short run, an imbalance can occur in the economy, in which the unemployment rate may increase or decrease from the natural rate of unemployment, and prices and wages may not reach long-run equilibrium. Nonetheless, long-run equilibrium assumptions are still important in economic modeling and policy analysis, because they help understand how markets work in the long run and provide a basis for estimating inflation rates, interest rates, and sustainable economic growth. In addition, the monopolistic competition model also has assumptions about long-run balance. According to this assumption, in the long term, the company will only maintain normal profits. Normal profits are profits that are sufficient to cover production costs and invested capital without giving extra profits. In the long run, if there are economic benefits that arise from a particular product or service, then there will be entry of new competitors who want to enter the market and gain the same benefits. With this new competitor, the demand for the previously monopolized product will decrease and cause a decrease in price. Conversely, if the company suffers a loss, the company will exit the market and demand will decrease so that prices will increase. However, this assumption does not always occur in the real world. Sometimes, companies can maintain above-normal profits in the long run by creating products or services that are very different and difficult for competitors to imitate, or by monopolizing extremely scarce resources. In this case, the government can intervene through regulations or restrictions on companies that monopolize the market. This aims to ensure healthy and fair competition and consumer protection from harmful business practices. The assumption of long-run balance is one of the assumptions in economic analysis, especially in macroeconomic analysis. This assumption states that the economy will reach a long-run equilibrium in which all factors of production and other inputs will be used efficiently, and prices will reflect the true value of goods and services traded in the market. In long-run equilibrium, this assumption presupposes that all economic variables will adjust themselves to achieve the desired long-run balance, such as the balance between supply and demand in the market, the balance between wage rates and product prices, and the balance between investment and savings. However, in practice, the long-term balance can be affected by various external factors such as technological changes, government regulations, and unpredictable fluctuations in the global economy. Therefore, the assumption of long-run equilibrium is often criticized because it does not fully reflect the complexities of the real world. Nonetheless, the long-run equilibrium assumption is still used in many economic models and theories as a reference point for analyzing short-term changes in the economy, and forms the basis for developing general equilibrium models to estimate the impact of government policies on the economy. The assumption of long-run equilibrium refers to the idea that over a long enough period of time, the market will reach equilibrium on its own. In this context, balance refers to the level of output and price at which there is neither excess supply nor demand. In the neoclassical economic model, this assumption is assumed to be a long-term balance or post-adjustment balance. In this balance, the factors of production can move freely between industry and capital, labor and natural resources are used efficiently and there is no significant imbalance in the economy. However, long-term balance may not be achieved in practice for several reasons, such as market constraints, technological changes, demographic changes, and government intervention. In addition, market failures, including market inefficiencies, can prevent long-run equilibrium from being achieved. In practice, many government policies are designed to reduce imbalances and achieve a more ideal long-term balance. Examples of these policies include environmental regulations, carbon taxes, and tax incentives for investments in clean technology and renewable energy.