How is Equilibrium Income Determined in the Short Run?
Determination of equilibrium income in the short run is a core macroeconomics topic relevant for Class 12, UGC NET, and other Commerce exams. It explains how national income is fixed where aggregate demand equals aggregate supply. Mastery helps students in exams and builds understanding for policy and business applications.
| Key Concept | Description | Application in Equilibrium |
|---|---|---|
| Aggregate Demand (AD) | Total spending on goods/services (C + I + G + NX) | Determines demand side of equilibrium |
| Aggregate Supply (AS) | Total output firms are willing to supply at a given price | Represents supply side for income determination |
| Equilibrium Income | Level where AD = AS | Indicates stable national income/output |
| Saving–Investment (S = I) | Alternate approach using savings and investment | Verifies macroeconomic equilibrium |
Definition of Equilibrium Income in the Short Run
Equilibrium income in the short run is the level of national income where aggregate demand equals aggregate supply. At this point, the planned total spending on final goods matches the output produced by firms. This is a fundamental result in Keynesian theory and central to school and college economics.
Formula and Approaches to Determining Equilibrium Income
There are two main approaches to determine equilibrium income in the short run: the AD = AS (Aggregate Demand–Aggregate Supply) approach and the Saving–Investment approach. Both are important for exam preparation and business applications.
| Method | Formula | Description |
|---|---|---|
| AD–AS Approach | AD = AS or C + I + G + NX = Y |
Find income (Y) where total planned expenditure equals output |
| Saving–Investment Approach | S = I | Find income where actual savings equals planned investment |
Step-by-Step Process for Determination of Equilibrium Income
Understanding the step-by-step determination is vital for fast revision and numerical questions. The AD = AS approach uses tables and diagrams to identify equilibrium income. Here’s a clear process, useful for Class 12 and UGC NET:
- List different possible levels of income (Y).
- Calculate AD (typically C + I + G + NX) for each Y.
- Find where AD equals AS or total output (Y).
- This intersection is the equilibrium level of income.
| Income (Y) | Aggregate Demand (AD) | Aggregate Supply (AS) | AD - AS | Equilibrium? |
|---|---|---|---|---|
| 100 | 160 | 100 | +60 | No (Excess Demand) |
| 200 | 240 | 200 | +40 | No |
| 300 | 320 | 300 | +20 | No |
| 400 | 400 | 400 | 0 | Yes (Equilibrium) |
| 500 | 480 | 500 | -20 | No (Excess Supply) |
Graphical Explanation of Equilibrium Income
The AD–AS diagram is a key tool for visual learners. On a graph, the 45-degree line shows points where output (AS) equals income (Y). The AD curve plots planned expenditure at different income levels. Where the AD curve meets the 45-degree line, equilibrium income is determined. If AD is above AS, output will increase; if below, output falls.
Example for Exams
Suppose C = 60 + 0.8Y, and I = 80 (consumption and investment), then AD = 60 + 0.8Y + 80. Set AD = Y and solve for Y:
- AD = 60 + 0.8Y + 80 = Y
- 140 + 0.8Y = Y
- 0.2Y = 140
- Y = 700
At Vedantu, we simplify such calculations for students to ensure concept clarity.
Policy and Practical Importance of Equilibrium Income
Determination of equilibrium income in the short run helps in understanding inflation, unemployment, and recessions. If equilibrium is below full employment, there may be unemployment. Policies like government spending or monetary easing can raise AD to close this gap. This concept is critical for students aiming at competitive exams or a career in policy, finance, or business analytics. For further study, see Government Budget and the Economy and Keynesian Theory of Employment.
Summary Table: Key Points of Equilibrium Income Determination
| Step | Description |
|---|---|
| Define AD and AS | Total planned expenditure vs. total output |
| Set up equilibrium condition | AD = AS or S = I |
| Tabulate or calculate AD for different Y | Find matching values (AD = AS) |
| Locate equilibrium on graph | Where AD curve meets 45-degree line |
| Apply to policy and business decisions | Predict effect of shifts in demand/supply |
In summary, determination of equilibrium income in the short run is reached when aggregate demand equals aggregate supply. Understanding this helps students analyze economic conditions, score better in exams, and apply economic reasoning to real-world and policy challenges. For deeper learning, refer to Vedantu’s Commerce notes and explore related topics such as National Income and Circular Flow of Income.
FAQs on Determination of Equilibrium Income in the Short Run
1. What is the equilibrium income in the short run?
In the short run, equilibrium income is the level of national income where aggregate demand (AD) equals aggregate supply (AS). This means the total planned spending in the economy matches the total output produced.
2. What are the determinants of the equilibrium level of income?
The equilibrium level of income is primarily determined by the interaction of aggregate demand (AD) and aggregate supply (AS). Factors influencing AD include consumption, investment, government spending, and net exports. AS is influenced by factors like technology, labor force, and capital stock. Changes in any of these factors shift the AD or AS curves, leading to a new equilibrium.
3. Which formula is used for short run equilibrium income?
The basic formula for short-run equilibrium income is AD = AS. However, this can be expressed in different ways depending on the approach used. For instance, the saving-investment approach equates planned saving with planned investment. The Keynesian model uses a formula based on marginal propensity to consume (MPC) and autonomous investment. In the AD-AS model, equilibrium is found graphically where the aggregate demand and aggregate supply curves intersect.
4. How is equilibrium level of income determined using AD = AS?
The AD = AS approach determines equilibrium income by finding the point where planned aggregate expenditure (AD) equals the actual level of output (AS). This can be done through a tabular representation showing various levels of income and the corresponding values of AD and AS. The point where AD and AS are equal represents the equilibrium level of income. Graphically, this occurs at the intersection point of the AD and AS curves.
5. How does the saving-investment approach determine equilibrium income?
The saving-investment approach determines equilibrium income by equating planned saving (S) with planned investment (I). In this approach, equilibrium occurs when leakages (saving) equal injections (investment) into the circular flow of income. Any difference between S and I will lead to changes in national income until equilibrium is reached. This approach is another way of representing the AD = AS condition.
6. What is the short run equilibrium formula?
The short-run equilibrium is represented by the equation AD = AS (Aggregate Demand equals Aggregate Supply). This signifies the point where planned spending matches the actual output produced in the economy. Other equivalent formulations exist, such as the equality between saving and investment (S = I).
7. What is short run equilibrium?
Short-run equilibrium refers to the situation in macroeconomics where aggregate demand equals aggregate supply, leading to a stable level of national income and output. This is a temporary equilibrium that could be affected by shifts in AD or AS.
8. What is the meaning of short-run equilibrium in economics?
In economics, short-run equilibrium describes a macroeconomic state where aggregate demand (AD) and aggregate supply (AS) are equal, resulting in a stable level of national income. Crucially, this is a short-term balance, as it assumes certain factors like prices and technology are fixed. A change in any of these fixed factors would shift AD or AS, causing the economy to move toward a new equilibrium.
9. How to determine equilibrium income?
Equilibrium income is determined by finding the point where aggregate demand (AD) equals aggregate supply (AS). This can be done using either a tabular approach, comparing AD and AS at different income levels, or a graphical approach, where the intersection of the AD and AS curves represents the equilibrium. The saving-investment approach (S=I) is another method to find this equilibrium point.
10. What is the equilibrium of the short run?
The short-run equilibrium is the point where aggregate demand (AD) and aggregate supply (AS) are equal, represented by AD = AS. This signifies a temporary balance in the economy, where planned spending matches actual production. This equilibrium can be disturbed by changes in factors like consumer spending, investment, or government policy.
11. How to determine equilibrium income in the short run?
Equilibrium income in the short run is determined where aggregate demand (AD) equals aggregate supply (AS). This can be found graphically using the AD-AS model, or numerically using a table showing planned expenditure and actual output at different income levels. The saving-investment approach (S=I) is an alternative method for determining the equilibrium income.
