Ch 4Determination of Income and Employment — Class 12 Economics, concept-first.

Until now, the national income, the price level and the rate of interest have all been treated as given facts -- numbers to be measured, not explained.

The terms consumption, investment, and total output of final goods (GDP) appear in two different senses.

The single most important factor that determines how much households want to spend on consumption is their income.

Investment, in economics, means something very specific: it is the addition to the economy’s stock of physical capital.

In an economy without a government, the planned (ex ante) aggregate demand for final goods comes from exactly two sources: households who consume, and firms who invest.

In microeconomics, when you study a single market, the demand and supply curves intersect to determine both the equilibrium price and the equilibrium quantity simultaneously.

The consumption function is given by the equation:

The equilibrium level of income is determined by aggregate demand. If aggregate demand changes, the equilibrium level of income must change as well.

The previous section showed that an autonomous expenditure increase of 10 units raised equilibrium income by 50 units (from 250 to 300).

The equilibrium level of output that we have been discussing — the point where aggregate demand (AD) equals aggregate supply (Y) — does not automatically mean that everyone who wants a job has one.

The key terms introduced in this chapter, gathered in one place for quick revision — a compact glossary for this CBSE Class 12 Economics chapter.

- Aggregate Demand (AD) is the total planned spending in the economy: . In a two-sector closed economy, . - Aggregate Supply (AS) is the total planned output, which equals national income ().

Questions from official CBSE sample papers.