EQUILIBRIUM LEVEL OF OUTPUT
The level of output in which planned or desired purchases by consumers, businesses, governments and
foreigners equals actual aggregate output.
When the economy is in equilibrium, producers have no incentive to increase (or decrease) output.
AGGREGATE PLANNED EXPENDITURES = TOTAL ACTUAL OUTPUT
Total Production = Production for immediate sale + Production to increase inventories
Equilibrium is achieved when people want to buy everything that has been produced for immediate sale. In this case, the
firm’s level of inventories will be at exactly the desired level.
Equilibrium is achieved if the amount that people desire to spend matches the amount that producers produced for
THREE POSSIBLE SCENARIOS
CASE 1. OUTPUT FOR SALE > DESIRED PURCHASES
If actual output for immediate sale exceeds desired spending, then producers produced too much and inventories will
increase above the desired level.
Signal to producers: REDUCE OUTPUT
If actual output exceeds desired output, actual output will decline.
CASE 2. OUTPUT FOR SALE < DESIRED PURCHASES
If actual output is less than desired spending, people purchase more than expected and inventories will decrease below
the desired level
Signal to producers: INCREASE OUTPUT
If desired output exceeds actual output, output will increase. CASE 3. OUTPUT FOR SALE = DESIRED SPENDING
If actual output equals desired spending, then people purchased exactly what the producers expected and inventories will
remain at the desired level
Signal to producers: DO NOT CHANGE OUTPUT
If actual output equals desired output, equilibrium is achieved and output does not change.
EQUILIBRIUM INCOME IN THE KEYNESIAN MODEL
ACTUAL OUTPUT = the actual level of C + I + G + NX
The amount that households, firms, governments and foreigners ACTUALLY purchase
DESIRED SPENDING = the desired level of C + I + G + NX
The amount that households, firms, governments and foreigners WANT to purchase
DESIRED SPENDING depends on the ACTUAL level of output because C depends on Y.
EQUILIBRIUM OUTPUT = Y e
The level of output such that producers have no incentive to change the scale of production