Revision: Introductory Macroeconomics >> Determination of Income and Employment CUET (UG) Determination of Income and Employment

Aggregate demand: Aggregate demand implies the total demand of final goods and services by various individuals in all the sectors in an economy. It expresses the total demand in terms of money. In this manner, it can be defined as the actual aggregate expenditure incurred by all the people in an economy on different goods and services.

AD = C + I + G + (X – M)
Where,
Demand by households - Private consumption expenditure (C)
Demand by firms - Private investment expenditure (I)
Demand by government - Government expenditure (G)
Demand by foreign sector- Net exports (X – M)
Where, X is exports and M is imports.

Aggregate supply refers to the aggregate production planned by all the producers during an accounting year. In other words, aggregate supply indicates the total amount of goods and services produced within an economy at a given general (or overall) price level during an accounting period. The aggregate supply function is represented as follows.

`"AS" = f (barN, barL, barK, barT)`

where,

AS = Aggregate supply

N = Natural resources

L = Labour

K = Stock of capital

T = State of technology

The Aggregate Supply Function (ASF) is a schedule that presents the different amounts of income that all entrepreneurs in an economy need to obtain from selling output at different levels of employment.

Investment multiplier or simply ‘multiplier’ implies that any change in the investment leads to a corresponding change in the income and output by multiple times. That is, in other words, the change in the income and output is more than (or multiple times) the change in investment. For example, if investment increases by 10%, then the corresponding increase in the income and output will be more than (let's say 30% or 40%) the increase in the investment. Algebraically, the investment multiplier is expressed as a ratio of the change in output to the change in investment. 

The investment multiplier is defined as the multiple amount by which income increases as a result of increase in investment expenditure.

Aggregate demand (AD) is the total planned spending on domestically produced final goods and services in an economy during a given period.

AD = C + I + G + (X − M)

Where:

• AD: Aggregate demand or aggregate expenditure (total planned spending).
• C: Desired consumption expenditure by households.
• I: Desired investment expenditure by firms.
• G: Desired government expenditure on goods and services.
• X: Exports of goods and services (what foreigners buy from us).
• M: Imports of goods and services (what we buy from other countries).
• (X – M): Net exports (exports minus imports).

C = F(Y)

The algebraic expression of consumption function is:
𝐶 = \[\overline{C}\] +𝑏⁢𝑌
Where, C = Consumption
            \[\overline{C}\] = Autonomous consumption,
                                 i.e. consumption at zero level of income
             b = Marginal Propensity to Consume
             Y = Disposable income, i.e. income after tax

\[\mathrm{MPS}=\frac{\Delta S}{\Delta Y}\]

Where:

• ΔS = change in saving
• ΔY = change in income

\[K=\frac{\Delta Y}{\Delta I}\]

where:

• K = investment multiplier
• ΔY = change in income
• ΔI = change in investment

• AD determines income levels through its four components, each with unique drivers like income for C and rates for I.
• Policy can boost AD by increasing G or lowering interest rates to stimulate growth.
• Understanding planned vs actual demand explains inventory adjustments and equilibrium.
• For exams, memorize the AD formula and one key driver per component.

• Involuntary unemployment is when someone wants and is able to work but cannot find a job.
• Voluntary unemployment is by personal choice and not considered in economic unemployment rates.
• Full employment does not mean zero unemployment but the absence of involuntary unemployment.

• Full employment exists when all people willing to work at the prevailing wage rate are employed.
• It does not include voluntary unemployment (e.g., idle rich).
• Frictional unemployment (about 3–4%) due to job changes or structural shifts is normal.
• An economy is at full employment even with this natural rate of unemployment.