OUTPUT AND EMPLOYMENT
The equilibrium output in the economy also determines the level of employment, given the quantities of other factors of production (think of a production function at aggregate level). This means that the level of output determined by the equality of Y with AD does not necessarily mean the level of output at which everyone is employed.
Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y(Income) and AD by itself does not signify full employment of resources. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output.
If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It will lead to a rise in prices in the long run.
Q) If output equilibrium is less than the full employment level, then this condition is known as:
Correct Answer :
Deficient Demand.
Solution :
The correct option is Deficient Demand.
Step-by-Step Explanation:
1. Understanding Equilibrium Output and Full Employment:
In macroeconomic theory, the equilibrium level of output () is determined where aggregate supply or income () equals aggregate demand (). However, this equilibrium point does not automatically guarantee that all resources or factors of production (such as labor and capital) in the economy are fully utilized. The level of output where all resources are fully employed is called the full employment level of output.
2. Analyzing the Under-Equilibrium Condition:
When the actual equilibrium level of output is less than the full employment level of output, it indicates that the economy is producing below its maximum potential capacity. This shortfall occurs because the total spending or aggregate demand in the economy is insufficient to buy the volume of goods and services that would be produced if all resources were fully employed.
3. Defining Deficient Demand:
As stated in the provided text, when the equilibrium level of output is less than the full employment level because aggregate demand is not enough to employ all factors of production, this situation is formally referred to as a situation of deficient demand. This lack of demand leads to involuntary unemployment and can put downward pressure on prices in the long run.
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