The level of income and output in an economy is determined at that point where; aggregate demand is equal to aggregate supply.
AD= C+I
AS=C+*
AS=Y (refers to countries national income)
At equilibrium point AD=AS.
Equilibrium can be achieved at full employment and even at under employment situation. It may not be always at full employment condition in an economy. We can explain it with the help of following schedule and diagram-
| Income Y) | Consumption(C) | Investment (I) | AD=C+I | AS=Y | Remark |
| 0 | 50 | 100 | 150 | 0 | AD>AS |
| 100 | 100 | 100 | 200 | 100 | |
| 200 | 150 | 100 | 250 | 200 | |
| 300 | 200 | 100 | 300 | 300 | AD=AS |
| 400 | 250 | 100 | 350 | 400 | |
| 500 | 300 | 100 | 400 | 500 | AD<AS |
The above schedule shows equilibrium level of income is Rs 300 where AD=AS 300=300.
We can explain it with the help of diagram as follows-
In diagram OY is the equilibrium level of income because at E aggregate demand is equal to aggregate supply. Before this equilibrium level of income and output, when income falls to OY0, AD is D0Y0 against AS is S0Y0. This AD > AS indicates planned spending > planned output then there will be more demand for goods and services so the firms will increase the output .Consequently, employment ,output and income will be increased till the equilibrium level of income and output OY is reached where AD = AS.
On the other hand, when AD < AS it means planned spending < planned output, then there will be unsold stock of goods with the firm so the firm will reduce the level of output to the equilibrium output. Consequently, output, income and employment will be reduced till the equilibrium level of income and output OY is reached where AD = AS.
