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In Ben Bernanke's Macroeconomics, he says that according to the Keynesian view, in the short run, firms are (at least temporarily) willing to increase or decrease production to meet aggregate demand, leading to equilibrium in the short run. But then he writes

However, in another sense the goods market is not in equilibrium at point F. The problem is that, to meet the aggregate demand for goods at F, firms have to produce more output than their full-employment level of output, Y. Full-employment output, Y, is the level of output that maximizes firms’ profits because that level of output corresponds to the profit-maximizing level of employment

Why would firms be willing to temporarily employ more workers and increase their output if that decreases their profits?

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  • $\begingroup$ The assumption not explicitly referenced in your post seems to be one of already being at full employment. Much of the Keynsian analysis of effective aggregate demand occurs with the understanding that economies routinely operate at below full employment such that increases in aggregate demand can and does induce firms to lift production (by hiring more people and bringing idle capacity online). Clearly, beyond full employment, you'll quickly get inflationary pressures as firms compete for resources (labour, etc). $\endgroup$
    – Jamie Smith
    Commented Oct 14 at 15:25

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Usually, prices are assumed to be fixed in the short run. If demand for a firm's product at posted prices unexpectedly increases above the short-run profit-maximizing level (e.g., due to marginal costs increasing), there are only two ways out:

  1. nevertheless satisfy demand at these given prices or
  2. rationing, where only some customers receive the goods, and others get told the company is (quite permanently) out of stock.

A story often told is that firms prefer to do the former. It can be seen as an investment into increasing the customer base, which may pay off in the long run. Moreover, we empirically don't see widespread rationing, although the evidence is not entirely clear-cut, e.g. Cavallo/Kryvtsov (2023)

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  • $\begingroup$ Well, wouldn't the timescale firms would need to hire and train more workers to produce the output needed be long enough that prices can adjust? In the immediate short run, I understand we assume prices are fixed, but can the amount of workers employed by firms really adjust in this short timespan? $\endgroup$
    – User2956
    Commented Oct 14 at 13:27
  • $\begingroup$ In the very short run, you can have people work overtime or introduce additional shifts. Overtime surcharges are costly. $\endgroup$
    – jpfeifer
    Commented Oct 14 at 15:43
  • $\begingroup$ Ah okay, that makes sense $\endgroup$
    – User2956
    Commented Oct 14 at 15:50

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