 # Determination of Equilibrium Income in the Short Run

## How is equilibrium income determined in the short run?

Students can recollect that in the theory of microeconomics when we scrutinise the equilibrium of demand and supply in a single marketplace, the demand and supply curves simultaneously decide the equilibrium cost price and the equilibrium quantity. In the theory of macroeconomics, we can begin in two steps:

At the first stage, we work out a macroeconomic equilibrium, taking the cost price level as fixed. At the second stage, we allow the cost price degree to vary and again, scrutinise the macroeconomic equilibrium.

What is the justification for taking the cost price degree as fixed? Two reasons can be put forward.

At the initial stage, we are presuming an economy with unused resources: machinery, buildings, and employees or labours. In such a situation, the law of diminishing returns will not apply. Hence, the additional output can be manufactured without increasing marginal cost.

Accordingly, the cost price level does not differ even if the manufactured quantity changes.

This is just a simplifying presumption that will be changed later.

 Q.1- Explain the determination of the equilibrium level of income by using consumption. Answer: Equilibrium ●     According to the Keynesian theory, the equilibrium level of income in an economy is determined at the intersection point of AD and AS curves. Aggregate demand ● Aggregate demand means the total demand for final goods in an economy. ●     The AD curve has a positive slope, which means that when income increases, AD (expenditure) also increases. It is represented by C + I. Aggregate supply ● It is the value of the total quantity of final goods and services produced in the economic territory of a country. ● An aggregate supply curve is the sum total of consumption and saving. ●     It is a positively sloped 45° straight line curve starting from the origin.