According to Keynesian employment theory in short period; total production, i.e., national income in capitalist economy depends on the level of employment because in short period other factors of production such as capital, technique, etc., remain constant. Employment level depends on effective demand. That level of aggregate demand at which it becomes equal to aggregate supply is called effective demand.
Aggregate Demand: The total demand of goods and services in an economy is termed as 'aggregate demands' which is expressed in terms of total expenditure made in the economy. Thus, aggregate demand in an economy is measured in terms of total expenditure on goods and services.
In other words, aggregate demand refers to total expenditure that the residents of a country are ready to incurured on the purchase of goods and services at given level of income.
Aggregate Demand = Consumption Expenditure + Investment Expenditure
AD = C + I
Aggregate Supply: The concept of aggregate supply is related to the total supply of goods and services made available by all producers in the economy. It means that aggregate supply depends on the production made by producers.
A necessary condition of equilibrium (income level or employment level) in an economy is
Aggregate Demand = Aggregate Supply
C + I = C + S or I = S
Keynesian equilibrium process is as follows:
Equilibrium in Employment
Aggregate Demand AD = Aggregate Supply AS
| IF AD > AS |
If AS > AD |
Increase in employment of factors \(\rightarrow\) of factors
AD = AS |
Decrease in employment of factors \(\rightarrow\) Decrease in production of goods and services and at last
AD = AS |
Classical viewpoint explains the income equilibrium level at full employment level, i.e., aggregate demand can equal aggregate supply only at a point of full employment.
Countrary to it, according to Keynesian viewpoint aggregate demand equals aggregate supply full employment level (i.e., taken place at at the point before underfull employment- level). Aggregate demand has to be increased for increasing employment in the economy.
i.e., sin Keynesian viewpoint, underfull employment, equilibrium can be converted to full employment equilibrium only by increasing aggregate demand,
According to Keynes, "Under employment equilibrium is a situation in which aggregate demand (which is less than full employment aggregate demand) is equal to aggregate supply so that there is equilibrium but some resources remain unemployed."
In this situation, factors are not fully employed and all labourers do not get employment. According to Keynes, under employment situation appears due to deficient aggregate demand but not due to deficiency of aggregate supply.
In above Fig. at ON 1 employment level, AD = AS but it is a situation of under-full employment. When aggregate demand AD increases to AD1, full employment level On is obtained. Business studies.
