How is Equilibrium Income determined in the Short Run?
Students can recollect that, in microeconomic theory when we scrutinize the equilibrium of demand and supply in a single market place, the demand and supply curves simultaneously decide the equilibrium cost price and the equilibrium quantity. In macroeconomic theory we can begin in 2 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, scrutinize 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 : machineries, buildings and employees or labours. In such a situation, the law of diminishing returns will not apply; hence additional output can be manufactured without increasing marginal cost
- Accordingly, cost price level does not differ even if the quantity manufactured changes
- This is just a simplifying presumption which will be changed later
The above mentioned is the concept that is explained in detail about Determination of Equilibrium Income in the Short Run for the class 12 Macroeconomics. To know more, stay tuned to BYJU’S.