Equilibrium Output, Multiplier and Problems of Demand — Part 1: Equilibrium and the Multiplier: visual lesson, ISC Class 12 Economics

Lesson

Equilibrium Output and the Multiplier

Part 1 — how equilibrium income is fixed, how the economy adjusts, and how a change in investment is multiplied into a bigger change in income.

In this lesson you will

Find equilibrium income by the AD = AS and S = I approaches, from a schedule and a diagram
Explain how output adjusts when planned spending and output differ
Calculate the investment multiplier and the change in income, and explain its working round by round

Part 1 at a glance

Concept

Equilibrium: planned spending equals output

In a two-sector economy AD = C + I and AS = Y (the value of output). Equilibrium income is the income at which AD = AS.

AD = C + I and AS = C + S, so both conditions pick the same income.
Approach	Condition	Why it holds
AD = AS	C + I = Y	Planned spending buys exactly what is produced
S = I	Planned saving = planned investment	The leakage from spending is matched by the injection

Worked example

Worked example 1: a schedule for Tarangpur

Imagined economy, ₹ crore: C = 60 + 0.8Y, I = 40. Find the income where AD = Y.

Step 1 — AD = C + I at each income.
Step 2 — Compare AD with Y.
Step 3 — AD = Y at 500; check S = I there.

Imagined figures, ₹ crore.
Y	C	S	I	AD = C + I	Output will…
0	60	-60	40	100	rise
100	140	-40	40	180	rise
200	220	-20	40	260	rise
300	300	0	40	340	rise
400	380	20	40	420	rise
500	460	40	40	500	stay (equilibrium)
600	540	60	40	580	fall
700	620	80	40	660	fall

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