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
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
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
Now, According to Keynes
Equilibrium Point is Determined at point where
Aggregate Demand = Aggregate Supply
Hence, Value of these 2 should be equal
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
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
Income | Consumption | Savings | Investment | AD | AS |
Y | C | S | I | C + I | Y |
0 | 50 | -50 | 100 | 150 | 0 |
100 | 100 | 0 | 100 | 200 | 100 |
200 | 150 | 50 | 100 | 250 | 200 |
300 | 200 | 100 | 100 | 300 | 300 |
400 | 250 | 150 | 100 | 350 | 400 |
500 | 300 | 200 | 100 | 400 | 500 |
Equilibrium level of income is Rs 300 because at this point AD = AS = 300
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 |
- Calculate AD and AS
- At what level of income will the economy be in equilibrium?
- State the level of income where total saving is negative
- Are saving and investment equal at equilibrium level of income?
- Calculate MPC and MPS, when the income increases from Rs400 crores to Rs500 crores
- What will be the AD at the income level of Rs 300 crores.
Income | Consumption | Savings | Investment | AD | AS |
Y | C | S | I | C + I | Y |
200 | 220 | -20 | 40 | 260 | 200 |
300 | 300 | 0 | 40 | 340 | 300 |
400 | 380 | 20 | 40 | 420 | 400 |
500 | 460 | 40 | 40 | 500 | 500 |
600 | 540 | 60 | 40 | 580 | 600 |
700 | 620 | 80 | 40 | 660 | 700 |
2. Equilibrium level of income is Rs 500 because at this point AD = AS = 500
3. When the income is Rs200, savings is negative
4. Yes, savings and investment are equal (Rs40) at the equilibrium level of income
5. MPC = Delta C/ Delta Y
MPC = 80/100
MPC =0.8
MPC + MPS = 1
0.8 + MPS = 1
MPS = 0.2
6. At income level of Rs300, AD = 340
NCERT Questions
No questions in this part
Other Books
Question 1
How is equilibrium level of income attained through AD and AS approach?
View AnswerAccording to Keynes,
Equilibrium Point is Determined at point where
Aggregate Demand = Aggregate Supply
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