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TOPICS

PRODUCTION POSSIBILITY CURVE.

CONCEPT OF DEMAND.

SHIFT IN DEMAND CURVE AND MOVEMENT ALONG

THE DEMAND CURVE. CONCEPT OF SUPPLY.

SHIFT IN SUPPLY CURVE AND MOVEMENT ALONGTHE SUPPLY CURVE.

EQUILIBRIUM PRICE.

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(PPC)

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COTENTS

DEFINITION OF PRODUCTIONPOSSIBILITY CURVE.

PRODUCTION POSSIBILITY SCHUDLE.

PRODUCTION POSSIBILITY CURVE.

SHIFT IN PRODUCTION POSSIBILITYCURVE.

CURVE SHOWING UNDERUTILIZATION OF RESOURCES ANDFULL UTILIZATION OF RESOURCES.

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Objectives

To understand meaning of PPC.

To understand PPC schedule.

To understand PPC.

To understand why it is concave to the origin.

To understand that any point inside it shows underutilization of resources , point on it shows full

utilization of resources. To understand central problems.

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PRODUCTION POSSIBILITYCURVE

Production possibility curve is that curvewhich represents the maximum amount ofa pair of goods or services that can both

be produced with an economys givenresources and technique, assuming thatall resources are fully employed.

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Assumptions of PPC

(a) Fixed quantity of factor of production ofproduction.

(b) Resources are fully and efficientlyutilized.

(c) Technology of production remainsconstant.

(d) Assumption of two goods.

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PRODUCTION POSSIBILITYSCHUDLE

A GOOD B GOOD

0 100

1 90

2 70

3 40

4 0

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A4

A3

PRODUCTION POSSIBILITY CURVE

B1 B2 B3 B4 B5O

A5

A2A1

B GOOD

AGOOD

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Two Basic Properties of PPC (1)Production Possibility Curve Slopes Downwards:

Production possibility curve slopes downwards from leftto right. It is because in a situation of fuller utilization ofthe given resources, production of both the goods cannot be increased. More of good-Can be produced onlywith less of good-Y.

(2) 1)Production Possibility Curve is concave to thepoint of origin; It is because to produce eachadditional unit of good-X, more and more unit ofgood-Y will have to be sacrificed than before.Opportunity cost of producing every additional unitof good

X tends to increase in terms of loss of

production of good-Y.In other words, production willobey the Law of Increasing opportunity cost

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o P

P

P1

P1GROWTH OF RESOURCES

B GOOD

A

GO

OD

InitialResources

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Z E

W

S

O

A

GOOD

B GOOD

Y

P

P

Unattainablecombination of

output

.Underutilization ofresources

..

.

..

.

Full Utilizationof resources

.

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OPPORTUNITY COST Opportunity Cost:- Opportunity Cost refers to value of a

factor in its next best (or second best) alternative use.AvailableResources

One hectare of land and agiven package of otherinputs

Possibleuses of land

Use-1Production of wheat

Use-2 Production of Rice

Use -3 Production of maize

Market value

of production

Use-1 Rs. 6000

Use-2 Rs. 5000

Use-3 Rs. 4000

Assumption Technique of production is

constant and resources arefully utilized

Y

XO

A

B

Use-1valueofoutput

Rs.6000

Use-2 value of output

Rs. 5000

Opportunity cost of employing resources in use -1=loss of

out put in next best alternative use of the given resources

which is Rs. 5000 in use -2

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Evaluation

Define P.P.C. ?

What does slope of P.P.C show ?

What does the point inside the P.P.C.show ?

What does the shifting of P.P.C show ?

Can you show the central problemsthrough the P.P.C ?

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DEMANDMeaning the quantity of a

commodity or service that a

consumer would buy at a givenprice and at a given time .

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Contents of demand

Desire for acommodity.

Ability to pay. Readiness to

spend. Specific time. Specific place. Specific price.

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FACTORS AFFECTING DEMAND

1. Price of thecommodity.

2. Income of the

consumer.3. Price of related

goods.

4. Tastes andpreferences.

5. Future expectations.

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LAW OF DEMANDIf other things remaining thesame, when the price of a

commodity increases, itsdemand falls and when theprice falls, its demand

increases.

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Assumptions of law of Demand(1)Income of the consumer remains constant.

(2)There is no change in the taste and preference of theconsumer.

(3)No change in price of the related good.

(4)The commodities are normal.

(5)There is no expectations of change in price in near future.(6)No new substitute of the commodity are available.

(7)No change in the distribution of income and wealth.

(8)Other relevant factors like size and composition ofpopulation, seasonal and climate factors, economiccondition of the country etc. remain unchanged.

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RELATION OF PRICE WITHDEMAND

PRICES (Rs.) DEMAND (Qt.)

1 5

2 4

3 3

4 2

5 1

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X

Y

O

Quantity

Price

D

D

1

5

1 5

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DIFFERENCE

Sr.no Change in Quantity Demand Change in Demand

Base of

difference

Definition Change in Quantity demanded

refers to increase or decrease

In quantity purchased of a

commodity in response todecrease or increase in its

price other than its

determinants.

Movements along the

Demand curve

(1)Extension of Demand

(2)Contraction of Demand

Change in Quantity

demanded refers to

increase or decrease In

quantity purchased of a

commodity in response

to change in other

determinants of demand,

other than price of the

same commodity.

Shifting of the Demandcurve

(1)Increase in Demand

(2)Decrease in Demand

Alternative

Name

1

2

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Difference between Contraction and Decrease in Demand

This is caused only by

change in the price of

concerned commodity Increase in price of

the commodity is the

only cause

This is caused by change in

determinants, other than

price of the concernedcommodity

Several causes: Decrease

in income, decrease in price

of substitute good, increasein price of complementary

good,

Price (x) Quantity (Units)

10 30

10 20

Price(Rs.)

Q.D.

Quantity (Units) Description

1 5 p

D

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Contraction of demand

M

Quantity

Price

QQ1

N

O

P

P1

D

D

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Decrease in demand

EE1

D

D

D1

D1

QQ1O

Quantity

Price

Y

x

P

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Extension of demand

L

K

D

D

Y

Quantity

Price

P

P1

Q Q1O

P1P1P1P1

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p

O X

Y

D

PRICE

QUANTITY

E

DD1

D1

E1

1

Increase in demand

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VERY SHORT ANSWER TYPEQ .1 Define demand ?Q .2 Define supply ?Q .3 Define demand function ?Q .4 Define supply function ?

Q. 5 what do you understand by demand schedule ?Q.6 what do you understand by supply schedule ?Q 7 Explain the law of demand ?Q 8 what are the factors affecting demand ?Q 9 what are the assumptions of law ofdemand ?Q 10 what are the exceptions to the law ofdemand ?

Questions

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SUPPLY OF GOODS

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The supply of goods is thequantity offered for sale in a

given market at a given timeat various prices.

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The law of supply states that other things remaining constant,the higher the price the greater the quantity supplied or thelower the price the smaller the quantity supplied.

FACTORS AFFECTING SUPPLY

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FACTORS AFFECTING SUPPLYPrice Of Commodity.

*Price Of Factors Of Production.

*Productivity Of Factors.*Technology.*Numbers Of Firms.*Policy Of Govt.*Aim Of Firms.

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(1

) Individual SupplySchedule.

(2) Market SupplySchedule.

TYPES OF SUPPLY SCHEDULE

http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8http://rds.yahoo.com/S=96062857/K=flower/v=2/SID=w/l=II/R=148/SS=i/OID=874098353fc976a4/SIG=1qpmi037n/EXP=1126768655/*-http%3A//images.search.yahoo.com/search/images/view?back=http%3A%2F%2Fimages.search.yahoo.com%2Fsearch%2Fimages%3Fei%3DUTF-8%26p%3Dflower%26imgsz%3Dall%26fr%3Dslv1-%26b%3D141&h=480&w=591&imgcurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&imgurl=botit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.jpg&size=42.6kB&name=Flower_TC.jpg&rcurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&rurl=http%3A%2F%2Fbotit.botany.wisc.edu%3A16080%2Fimages%2F401%2FMagnoliophyta%2FMagnoliopsida%2FDilleniidae%2FTheaceae%2FStewartia%2FFlower_TC.html&p=flower&type=jpeg&no=148&tt=1,234,799&ei=UTF-8

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The table relating to price and

quantity Supplied is called thesupply schedule.

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Other things being are equal, whenquantity supplied of a commodityincreases due to rise in its price it is

called extension.

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DIFFERENCE BETWEENCHANGE IN QUANTITY SUPPLIED AND

CHANGE IN SUPPLY.

Change in quantity

Supplied

1. Due to change inprice.

2. Movement alongthe supply curve.

Change in supply

1. Due to change inother factors.

2. Shift in supplycurve.

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EXTENSION OF SUPPLY

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EXTENSION OF SUPPLY

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Other things being equal, when quantitysupplied of a commodity decreases due tofall in its price, it is called contraction of

supply.

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INCREASE IN SUPPLY

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INCREASE IN

SUPPLY More supply at same price

or same supply at less priceis called increase in supply.

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Increase in Supply

C S

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DECREASE IN

SUPPLY Less supply at same price and same

supply at more price is called decreasesupply.

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DECREASE IN SUPPLY

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Evaluation

What do you mean by supply ?

Define the law of supply ?

Name any four factors effecting the supplyof a commodity.

Define the expansion of supply.

What do you mean by contraction ofsupply ?

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Equilibrium Price Will be Shown by the Diagram

Effect of Change in demand on EquilibriumPrice- When supply is Constant ,Perfectly Elasticand Perfectly Inelastic

Effect of Change in Supply on Equilibrium Price-When Demand is Constant ,Perfectly Elastic andPerfectly Inelastic

Effect of Simultaneous Change in Demand andSupply

All the Effects Mentioned Above Will be Shownby the Diagrams

HERE ARE SOME PICTURES OF

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HERE ARE SOME PICTURES OFHOUSEHOLD COMMODITIES

Rs. 8,000/-Rs. 5/-

Rs. 20,000/-

THESE COMMODITIES HAVE

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THESE COMMODITIES HAVEDIFFERENT PRICES.

LETS KNOW HOW

THESE PRICESDETERMINED IN THE

MARKET.

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THE PRICE ON WHICH A COMMODITYIS SOLD AND PURCHASED IN MARKETIS CALLED EQUILIBIRIUM PRICE.

EQUILIBIRIUM PRICE IS THAT PRICEON WHICH THE DEMAND AND SUPPLY

OF A COMMODITY IS EQUAL TO EACHOTHER.

SCHEDULE OF EQUILIBIRIUM

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SCHEDULE OF EQUILIBIRIUMPRICE

PRICE(RS.) QT.SUPPLIED QT.DEMANDED

1 1 5

2 2 4

3 3 3

4 4 2

5 5 1

EQUILIBIRIUM PRICE

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EquilibriumPrice is thatprice at which

its twodeterminants-demand andsupply are in

balance, orequal.

E

D

D

S

S

P

QO X

Y

Price

Quantity

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p

OQ

X

S

D

PRICE

QUANTITY

E

P1

D

S

P2

EXCESS SUPPLY

EXCESS DEMAND

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Whensupplyisconstant

S

SD

D

D1

D1

P

Q

P1

Q1

E1

EPrice

QuantitO X

Y

When supply is Perfectly Elastic and

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When supply is Perfectly Elastic andincrease in demand

D

D

D1

D1

E E1S S

Q1QO X

Y

Quantity

Price

P

When Supply is Perfectly Inelastic and demand

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When Supply is Perfectly Inelastic and demandincreases.

Price

Quantity

O X

D

D

D1

D1

E

E1

Q

P

P1

Y

S

S

Effect of Decrease In Demand

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Effect of Decrease In DemandAnd no change in supply

D

D

D1

D1S

S

E

E1P1

P

QQ1 Quantity

Price

O X

Y

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When Supply is Perfectly Elastic

P

rice

P

D1

D1

D

D

SS

QuantityQQ1O X

Y

E1 E

When Supply is Perfectly

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When Supply is PerfectlyInelastic

D

D

D1

D1S

S

E1

E

P

P1

Price

QuantityQ

OX

Y

Effect of increase in supply and no

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pp ychange in demand

D

DS

S S1

S1

Q Q1

E

E1P

P1

Price

QuantityO

X

Y

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When Supply is Perfectly InelasticD

D

D1

D1S

S

E1

EP

P1

Price

QuantityQ

OX

Y

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When Demand is Perfectly Elastic

O

S

S

S1

S1

E E1

Q Q1

Price

P

Quantity

X

Y

D D

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When Demand is Perfectly Inelastic

QQuantity

XO

S

S1

S

S1

E

E1

D

D

Y

Price

P

P1

Effect of Decrease in Supply and

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pp yno change in Demand

D

D

S

S

S1

S1

P1

P

E1

E

QQ1

Price

O X

Y

QuantityDEMANDED AND SUPPLIED

When Demand is Perfectly Inelastic

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When Demand is Perfectly Inelastic

S

S1

S1

S

Q

Price

P1

P

O X

Y

E1

E

D

D

Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Elastic

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When Demand is Perfectly Elastic

O

Quantity DEMANDED AND SUPPLIED

Price

P

QQ1 X

D

D

S

S

S1

S1Y

E1 E

Simultaneous Change in Demand

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Simultaneous Change in Demandand Supply

WhenChangesin

DemandandSupplyare Equal

D

D

D1

D1

S

S

S1

S1

E E1

Q Q1Quantit

OX

Y

Price

P

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Evaluation

Define the equilibrium price ? How does increase in demand effects

equilibrium price when supply is constant?

What will be the change in equilibriumprice, when demand is perfectly elasticand supply increases ?

What will be the change in equilibriumprice, when supply is perfectly inelasticand demand decreases ?

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OBJECTIVES

To know the meaning and components ofAD and AS.

To understand the concepts of inflationary

and deflationary gap through the diagrams

To understand the determination ofincome and employment through AD /AS

and saving and investment.

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Aggregate demand refers to the sum totalof demand for all the goods and servicesin the economy as a whole. It is measured

in terms of total expenditure on the goodsand services in an economy.

COMPONENTS OF AGGREGATE

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COMPONENTS OF AGGREGATEDEMAND

AD= C+I+G+(X-M).

C= Household consumption expenditure.

I=Investment expenditure.G=Govt. Expenditure.

(X-M)=Net export (Export- import).

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AGGREGATE SUPPLY

Aggregate supply refers to the flow ofgoods and services in an economy.

Aggregate supply is the minimum saleproceeds which the producer must get soas to continue production at any given

level of employment

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AS=C+S.

C=CONSUMPTION.

S=SAVING.

DETERMINATION OF OUTPUT

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DETERMINATION OF OUTPUT,INCOME AND EMPLOYMENT.

: AS/ AD approach Equilibrium level of output, income andemployment id determined at the point where aggregatedemand and aggregate supply are equal to each other.

Equilibrium : AD -=AS Since , AD = C + I and AS = C + S Equality between (C + I) and (C + S) simply implies the equality

between saving and investment . so that equilibrium occurswhere,

AS = AD or S = I Accordingly determination of output, income and employment

can be explained in two ways : 1.On the basis of equilibrium between aggregate demand and

aggregate supply 2.On the basis of equilibrium saving and investment

AS

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S

S

II

INCOMEAND EMPLOYMENT

.AD

Y

Y

E

E

INCOMEAND EMPLOYMENT

ADANDAS

SAV.ANDINV.

O

O

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INCOMEAND EMPLOYMENT

ADANDAS

o

E

Y

FULL EMPLOYMENT LEVEL

AD

AS

EQUILIBRIUM AT

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EQUILIBRIUM ATUNDEREMPLOYMENT

INCOMEAND EMPLOYMENT

ADANDAS

o

E1

Y1

FULL EMPLOYMENT LEVEL

AD1

AS

Y

ADEUNDEREMPLOYMENT EQ..

EQUILIBRIUM AT

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EQUILIBRIUM ATUNDEREMPLOYMENT

INCOMEAND EMPLOYMENT

INCOME

AND EMPLOYMENT

ADANDAS

o

E1

Y1

FULL EMPLOYMENT LEVEL

AD1

AS

Y

ADEUNDEREMPLOYMENT EQ..

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AS

AD

AD1E1

O

OVER EMPLOYMENT EQ.

Y

E

INCOMEAND EMPLOYMENT

ADAND

AS

FULL EMPLOYMENT LEVEL

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FULLEMPLOYMENT LEVEL SHOWSABSENCE OF UNVOULENTRYUNEMPLOYMENT.

UNDER EMPLOYMENT LEVEL SHOWSDEFICIENT DEMAND ,ALSO CALLEDDEFLATIONARY GAP.

OVER EMPLOYMENT LEVEL SHOWSEXCESS DEMAND, ALSO CALLEDINFLATIONARY GAP .

E l ti

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Evaluation

Define aggregate demand ?

What do you mean by aggregate supply ?

What are the components of aggregate

demand? Explain the full employment level equilibrium of

out put, income and employment.

Explain the equilibrium of out put, income andemployment through the help of AD/AS andSaving and investment.