Explain the changes that will take place in an economy when AD is not equal to AS?I am not able to explain this as we should take this at full employment level so 2 condition arise or somewhere in between so we can increase supply also as given in photo?
Dear students,
In such a case, either of two situations can take place:
1. When AD > AS : If total demand of goods and services are more than its supply. It will create a situation of excess demand. The producers will be induced to produce more and for increasing production they will employ more factors of production. With hiring of more factors of production, the income and employment level will rise. The output, income and employment will rise until excess demand wiped out or AD becomes equal to AS.
2. When AS > AD : If total supply of goods and services are more than its demand. It will create a situation of excess supply or deficit demand. This will lead to inventory accumulation, as due to deficit demand the producers pile up stock of unsold goods. It will force producers to cut down level of production. With fall in level of production, factors of production and employment level will reduce. The output, income and employment will continue to fall until excess supply is wiped out or AD becomes equal to AS.
Regards
In such a case, either of two situations can take place:
1. When AD > AS : If total demand of goods and services are more than its supply. It will create a situation of excess demand. The producers will be induced to produce more and for increasing production they will employ more factors of production. With hiring of more factors of production, the income and employment level will rise. The output, income and employment will rise until excess demand wiped out or AD becomes equal to AS.
2. When AS > AD : If total supply of goods and services are more than its demand. It will create a situation of excess supply or deficit demand. This will lead to inventory accumulation, as due to deficit demand the producers pile up stock of unsold goods. It will force producers to cut down level of production. With fall in level of production, factors of production and employment level will reduce. The output, income and employment will continue to fall until excess supply is wiped out or AD becomes equal to AS.
Regards