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DETERMINATION OF INCOME, OUTPUT AND EMPLOY MENT

There are two approaches for the determination of

equilibrium level of output .1) AS=AD Approach2) S=I Approach

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AD=AS Approach

AD refers to desired expenditure in the economy during the accounting year.

AD = C+I (C=consumption expenditure) ( I=Investment expenditure)

AS refers to desired output during an accounting year . Hence it is equal to Y(income )

AS = C +S (c = consumption expenditure) (s = saving)

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Equilibrium

• Equilibrium is attained when • AD=AS• The equilibrium can be attained

at • Full employment • Under employment & • Over full employment

conditions.

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• Schedule showing determination of equilibrium level of income .

Y C I AD=C+I AS= Y

0 50 100 150 0

100 100 100 200 100

200 150 100 250 200

300 200 100 300 300

400 250 100 300 300

500 300 100 400 500

The above table shows the equilibrium level of income at Rs . 300 crores because at this level of income AD(300 ) =AS(300)

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Diagram showing equilibrium level of income.

AD=C+I

Y=AS=C+S

AD=AS300

300

150

NATIONAL INCOME

x

Y

0

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ADJUSTMENT MECHANISM

What happens when AS> AD

What happens when AD> AS

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DIAGRAM SHOWING AS>AD (DEFICIENT DEMAND)

• AS> AD

AS>AD

Y=AS

C+I=AD

INCOME

AS, AD

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DIAGRAM SHOWING AD>AS(EXCESS DEMAND)

• AD> AS

AS>AD

Y=AS

C+I=AD

INCOME

AS,AD

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Equilibrium when S=I• Equilibrium level of income is determined at

a point where saving & investment are equal.• i.e, S=I

Y C S=Y-C I (INVESTMENT)

0 50 -50 100

100 100 0 100

200 150 50 100

300 200 100 100

400 250 150 100

The above table show the equilibrium level of income is Rs.300crores & at this point S(100) = I (100)

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Diagramatic presentation 0f s=i

100

National income

saving

investment

300X

Y

S=I

The diagram shows the equilibrium level of S=I

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THINK & ANSWER

• See the diagram & answer how equilibrium will be brought about if S>I or I > S.

S

I

income

S>I

I>S

S,I

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Questions for self-evaluation

• State the two approaches for the determination of equilibrium level of output .

• Explain the meaning of equilibrium level of national income with the help of a diagram.

• Explain what happen when• (1) AD>AS• (2) AD<AS

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Mrs. Anita Bhardwaj KV,

Vigyan Vihar

Mrs .Monika Bajaj KV,

Tagore Garden

Mrs. Leena Singh KV, AGCR

Mr. Sri Keshav KV, no.2 Delhi

Cantt

Mrs .Ritu Tanwar KV, AFS

Rajokri

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