Page 66 - DECO402_Macro Economics

Unit-6: Keynesian Theory of Employment

level, whenever the total anticipated receiving is more than from total cost. In other words, whenever Notes
the aggregate demand curve is up to aggregate supply curve (as show on the employment level ON
1
in figure 6.3), firms increases the employment level for receiving the more profit. If aggregate demand
curve is below in the aggregate supply curve (as shows on the employment level ON in figure 6.3),
2
then firm will decrease the employment level because of the loss by high cost. So Equilibrium will
decide at that point where both curves will intersect to each other.
In figure 6.3, aggregate demand and aggregate supply curve are intersecting on E to each other. It
point (ON point) says the equilibrium point of effective demand and employment. It point represents
expenses of produce things and services on
equilibrium of employment. Briefly, Effective
Demand = National product = Volume of
employment National income = National
expenditure = consumption expenses =
investment expenses. Firms have not the
increment and decrement nature at that point,
because its profits are more at that point. The
competition among labours takes employment Expenditure or Sales income
level on equilibrium.
When aggregate demand curve increase on
up side, then employment level increases. In
snatch the possibility of change is not existent
in aggregate supply curve, because that
production is based on techniques, availability
of raw materials and machinery. To increase
the productivity of labour in long period, Employment
the aggregate supply curve can be at below Fig 6.3: Equillibrium within Kension Theory
side. But it is not possible on unemployment
economy. Now it is important to say that Keynes considers an important decider of effective demand
and employment level to aggregate demand.
In Figure 6.4 according to the increment in aggregate demand, effective demand is shift at right side.
So the equilibrium point is become E to E which is according to the change in total demand. Because of
1
the change in total demand, there are the situations of unemployment in economy on ‘E’ point, where
NN labour are unemployed. Now an E point Economy gets the full employment equilibrium. There
1
F
all person are employed whose want. The situation of under-employment can be finish to change the
aggregate demand by increasing the investment expenses or consumption in an economics.

Did You Know? The level of employment production and income is decide by effective
demand, which itself decides by aggregate supply and aggregate
demand.

It is clear by above description that effective demand can also get the point of full employment or not. In
other words, effective demand is always not related to full employment level. The view point of Keynes
is that the situation of under-employment is a normal situation in a free entrepreneurship economy
and full employment is a situation of exception. A country can get the situation of full employment
in only the situation of more prosperity. The full employment is only possible in an economy, when
investment demand investment expenses can find the total supply and difference at that level. The
difference between income and consumption is due to inadequacy of bridging by investment that

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