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According to Keynesian theory

Equilibrium Level of Income is achieved at

Full Employment Level

Under Employment Level

Over Full Employment level

 

It means that Aggregate demand can be equal to Aggregate Supply at all 3 levels

Resources are fully employed

Resources are not fully employed

Resources are employed more than full employment level

Different Types of Equilibrium Level of Income - Teachoo.JPG

Lets learn about it one by one

 

 

Full Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are fully employed

 

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

 

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

Full Employment Level Graph - Teachoo.jpg

Note

We join E and x axis at Point Q

At this point, OQ is Equilibrium level of Output

At OQ level, it is assumed that all those who are willing to work are able to get work and find employment (there is full employment)

 

 

Under Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are not fully employed

 

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

 

We know that in case of Full Employment

AD and AS Curves normally intersect at Point E

 

But In case of Underemployment

Aggregate Demand Decreases from AD to AD1

 

Due to this ,AD1 and AS Curve met at Point F

Hence, F is equilibrium Point

We can say that in case of Underemployment, equilibrium Level shifts leftwards

Under Employment Level - Teachoo.jpg

Note

We join E and x axis at Point Q1

At this point,OQ1 is Equilibrium level of Output

Since OQ1 is less than OQ, it denotes resources are under employed

 

 

Over Employment Level

It refers to situation where

Aggregate Demand = Aggregate Supply

when Resources are beyond full employment level

 

Graph Representation

On X axis, we show Income or Output

On Y Axis, we show Demand

 

We know that in case of Full Employment

AD and AS Curves normally intersect at Point E

 

But In case of Overemployment

Aggregate Demand Increases from AD to AD1

 

Due to this ,AD1 and AS Curve met at Point G

Hence, G is equilibrium Point

We can say that in case of Overemployment, equilibrium Level shifts Rightwards

Over Employment Level - Teachoo.jpg

Note

If we join E and x axis at Point Q1

At this point,OQ1 should be Equilibrium level of Output

Hence, Output should increase beyond full employment level

This is not possible as resources are already fully employed and there is no idle capacity

This equilibrium Point is achieved by firms by increasing price of goods, not their quantities

Hence, there is no real increase in Output in this case

 

NCERT Questions

No questions in this part

Other Books

Question 1

What is meant by Full employment equilibrium?

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Question 2

What is meant by underemployment equilibrium?

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Question 3

What is meant by over employment equilibrium?

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Transcript

Different Types of Equilibrium Level of Income Equilibrium at Full Employment Level It means AD=AS when Resources are fully employed Equilibrium at Under Employment Level It means AD=AS when Resources are not fully employed Equilibrium at Over Full Employment Level It means AD=AS when Resources are employed more than full employment level Full Employment Level Graph It refers to situation where Aggregate Demand=Aggregate Supply when Resources are fully employed Graph Representation On X axis, we show Income or Output On Y axis, we show Demand It can be seen that AD is Positively Sloping Starting from Point M AS is also Positively Sloping but starts from Point 0. Point where AD and AS Curve intersect is equilibrium Point At this point, OQ is Equilibrium level of Output Under Employment Level It refers to situation where Aggregate Demand=Aggregate Supply when Resources are not fully employed Graph Representation On X axis, we show Income or Output On Y axis, we show Demand We know that in case of Full Employment AD and AS curves normally intersect at Point E But In case of Underemployment Aggregate Demand Decreases from AD to AD1 Due to this ,AD1 and AS Curve met at Point F Hence, F is equilibrium Point At this point,OQ1 is Equilibrium level of Output Since OQ1 is less than OQ, it denotes resources are under employed Over Employment Level It refers to situation where Aggregate Demand = Aggregate Supply when Resources are MORE THAN fully employed Graph Representation On X axis, we show Income or Output On Y axis, we show Demand We know that in case of Full Employment AD and AS Curves normally intersect at Point E But In case of Overemployment Aggregate Demand Increases from AD to AD1 Due to this ,AD1 and AS Curve met at Point G Hence, G is equilibrium Point We can say that in case of Overemployment, equilibrium Level shifts Rightwards At this point,OQ1 should be Equilibrium level of Output

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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.