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In Mankiw's Macroeconomics, he states that, in the short run, an economy's output depends both on its supply and demand for goods and services, because of price stickiness. In the long run, when prices are not sticky but flexible, he states that output depends solely on the supply side, on the availability of capital and labor and the level of technology.

How could demand not matter in the long-run? How could price flexibility in the long run render the will to buy irrelevant to the quantity bought? The absurdity of this question makes me guess that I grossly misunderstood his explanation.

If anyone could shed light on the matter it would be greatly appreciated.

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How could price flexibility in the long run render the will to buy irrelevant to the quantity bought?

  1. Demand is not just will to buy some quantity. Demand is relationship between quantity (in case of aggregate demand output) people want to purchase and price (in case of AD price level). Example of demand is $Q_D=100-p$ not that someone wishes to purchase 20 units of something. Wanting to purchase let's 20 units of output at current prices is the quantity demanded not demand.

  2. The price flexibility makes long run supply curve perfectly inelastic because if prices and by extension price level is fully flexible, any decrease/increase in prices will be just offset by deflation/inflation and suppliers wont be better of by supplying more or less. If supply is horizontal demand becomes irrelevant. Any shift in demand in either left or right leaves quantity produced unchanged.

    This becomes easier to understand once you see the graph of aggregate demand and supply in the long run (see my tikz picture below). As you can clearly see shift in demand has no effect on supply because supply is horizontal. You will find similar graphs in Mankiw's Macroeconomics if you continue reading on.

enter image description here

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  • $\begingroup$ "How could demand not matter in any time horizon?" I think what the OP means is "How could there be any time horizon in which demand does not matter?". $\endgroup$ Apr 11, 2022 at 20:07
  • $\begingroup$ @AdamBailey I guess you are right I edited my answer but I also edited OP question to be less ambigious $\endgroup$
    – 1muflon1
    Apr 11, 2022 at 20:10
  • $\begingroup$ @1muflon1 Thanks! The mechanism of inflation/deflation offsetting variations in price level is what I was missing, so your answer was very helpful. $\endgroup$
    – Leo_Gomes
    Apr 11, 2022 at 20:17
  • $\begingroup$ @Leo_Gomes you are welcome also just to be clear increase/decrease in price level is inflation/deflation. When it comes to science you need to be precise about language. When I said that increase/decrease in prices is offset by inflation/deflation i meant from perspective of supply. If you change your price for widget from 100USD to 110USD but there is 10% inflation and so price of inputs also rises as response to it you are not getting more money in real terms so why would you supply more widgets to the market, that’s what I was trying to say $\endgroup$
    – 1muflon1
    Apr 11, 2022 at 20:23
  • $\begingroup$ @1muflon1 but wait, i get that changes in price level caused by changes in money supply won't affect production in the long run, because as you said the rise in costs will offset the rise in prices. But aren't changes in prices due to changes in demand different? Maybe i'm thinking micro, and in fact rises in demand in the macro market for goods, on average, raises costs as much as prices, because the demand for inputs grows as much as the demand for consumer goods, and so, again, prices and costs are offset. Is that it? $\endgroup$
    – Leo_Gomes
    Apr 12, 2022 at 14:19

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