Open In App

How can we achieve equilibrium level?

Improve
Improve
Like Article
Like
Save
Share
Report

Classical economists state that the equilibrium level of income in an economy is always attained at full employment level. Full employment here means the absence of involuntary unemployment. However, according to the Keynesian theory, the equilibrium level can be attained at three levels:

  1. Full Employment Level, or
  2. Underemployment Level (Less than Full Employment Level), or
  3. Over Full Employment Level (More than Full Employment Level)

Full Employment is a situation in which all of those people who are willing and able to work at an existing wage rate without any undue difficulty, get work. In general, the term Full Employmentmeans that there is no unemployment in an economy; i.e., everyone gets a job. However, Involuntary Unemployment is a type of unemployment in which all those people who are willing and able to get work at an existing wage rate, do not get work. In simple terms, underInvoluntary Unemployment, people are unemployed against their wishes or under some compulsion. 

1. Full Employment Equilibrium

A situation when the aggregate demand is equal to the aggregate supply at full employment level is Full Employment Equilibrium. In the graph below, the full employment equilibrium is point E because at this point, the aggregate demand (EQ) is equal to OQ; i.e., full employment output level. In simple terms, at OQ output level, people who are willing and able to work at a prevailing wage rate are getting the job. At this point, there is no involuntary unemployment.

Full Employment Equilibrium

 

2. Underemployment Equilibrium

A situation when the resources are not fully employed at the point where the aggregate demand and aggregate supply are equal to each other is Underemployment Equilibrium. This point of equilibrium occurs before the full employment equilibrium. In the below graph, at point F, AD1 = AS, and this point is lower than the full employment level. Therefore, as OQ1 is less than OQ, point F indicates underemployment equilibrium.

Underemployment Equilibrium

 

3. Over Full Employment Equilibrium

A situation when beyond the full employment level, the aggregate demand is equal to the aggregate supply is Over Full Employment Equilibrium. This point of equilibrium occurs after the full employment equilibrium. In the below graph, at point G, AD1 = AS, and this point is higher than the full employment level. Therefore, point G indicates over full employment equilibrium.

Over Full Employment Equilibrium

 

However, in reality, the situation of over full employment equilibrium creates Inflationary Pressure. It is because over full employment equilibrium means that the planned expenditure is equal to the planned output at level which is higher than the full employment level, and in real life, the actual output can never increase beyond the full employment level as the economy is already at full employment and has no idle capacity. Therefore, if there is any increase in aggregate demand beyond the full employment output, then it will result in an increase in general price level or inflation, resulting in no real increase in the output.


Last Updated : 28 Mar, 2023
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads