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How to Determine Equilibrium Level of income

According to Keynes

Equilibrium Level of Income is determined at a point where

Aggregate Demand is equal to Aggregate Supply

AD = AS

How to Determine Equilibrium Level of income - Teachoo.JPG

Steps to Calculate Equilibrium Point - Teachoo.JPG

Explanation

We have already studied that

Aggregate Demand is

It means total demand of final goods and services of all sectors of an economy at a given level of income

Aggregate Demand = Consumption Exp + Investment Expenditure

AD=C+I

Step 1- Calculate AD - Teachoo.JPG

How to Draw AD  Graph - Teachoo.jpg

Aggregate Supply

Aggregate Supply means

total money value of goods and services

which all producers in economy

are willing to supply

Note

Aggregate Supply = National Income

AS = Y

Step 2 Calculate AS - Teachoo.JPG

How to Draw AS  Graph - Teachoo.JPG

Now, According to Keynes

Equilibrium Point is Determined at point where

Aggregate Demand = Aggregate Supply

Hence, Value of these 2 should be equal

Step 3 Calculate Equilibrium Point - Teachoo.JPG

How to Make Graph of AD and AS?

On X Axis, we show Income

On Y Axis, we show AD and AS

It can be Seen that

AD is Positively Sloping Starting from Point M

 

AS is also Positively Sloping but starts from Point 0.

It makes an angle of 45 Degree with Origin

 

Point where AD and AS Curve intersect is Equilibrium Point

At this Point, we draw a line EY connecting x axis at Point Y

This Y is Equilibrium Level of income

How to Draw Graph-AD,AS & Equilibrium Point - Teachoo.jpg

What happens when AD is more than AS - Teachoo.JPG

What happens when AS is more than AD - Teachoo.JPG

Example 22

Calculate Savings, AD, AS and determine equilibrium level if investment is fixed at Rs100 crores.

Income 0 100 200 300 400 500
Consumption 50 100 150 200 250 300

 

View Answer

Example 23

Suppose investment is Rs 40 crores.

The consumption expenditure, at different levels of income, is given below.

Income 200 300 400 500 600 700
Consumption 220 300 380 460 540 620
  1. Calculate AD and AS
  2. At what level of income will the economy be in equilibrium?
  3. State the level of income where total saving is negative
  4. Are saving and investment equal at equilibrium level of income?
  5. Calculate MPC and MPS, when the income increases from Rs400 crores to Rs500 crores
  6. What will be the AD at the income level of Rs 300 crores.
View Answer

NCERT Questions

No questions in this part

Other Books

Question 1

How is equilibrium level of income attained through AD and AS approach?

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Transcript

How to Determine Equilibrium Level of income? We know that Aggregate Demand is AD = C + IAggregate Supply is AS = C + SIf these 2 are equal It is called Equilibrium Point Equilibrium Level of Income is determined at a point where Aggregate Demand is equal to Aggregate Supply AD = AS Steps to Calculate Equilibrium Point We know that Equilibrium Level of Income is determined at a point where Aggregate Demand is equal to Aggregate Supply AD=ASSteps to Calculate Equilibrium Point Step 1 - Calculate AD Step 2 - Calculate AS Step 3 - Calculate Point where AD=AS, this point is Equilibrium Point Step 1- Calculate AD We have already studied that AD=C+I How to Draw AD Graph On X Axis, We represent Income On Y Axis, We Represent Expenditure/Savings/AD It can be seen that Consumption Curve C is Positively Sloping Investment Exp Curve is a horizontal line parallel to x axis Aggregate Demand is combination of Consumption and Investment Curve so it is also positively sloping Step 2 Calculate AS We have already studied that Aggregate Supply= Consumption +Savings AS=C+S Example AS=C+S Also AS=Y How to Draw AS Graph On X Axis, We represent Income On Y Axis, We Represent Expenditure/Savings/AS It can be seen that Consumption Curve C is Positively Sloping AS Curve is Positively Sloping starting from Origin making an angle of 45 degree with origin This is because AS=National Income Step 3 Calculate Equilibrium Point Step 3 Calculate Equilibrium Point What is Equilibrium point in following schedule? Equilibrium Point is calculated at Point where AD=AS It is at income level of 30000 What happens when AD is more than AS? In this case, Consumers are buying more goods But Firms are producing less. In this case, Firms will increase output so that There is an equilibrium (AD=AS) What happens when AS is more than AD? In this case, Consumers are buying less goods But Firms are producing more In this case, Firms will decrease output so that There is an equilibrium (AD = AS)

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.