CBSE Book Class 12 Economics Determination of Income

UNIT 7 - Determination of Income and Employment

Involuntary unemployment : Involuntary unemployment occurs when those who are able and willing to work at the going wage rate do not get work.

Aggregate demand : Aggregated demand means the total demand for final goods in an economy.

It also means the aggregate expenditure on final goods in an economy.

The components of aggregate demand are :

1. Demand for goods and services for private consumption also called private final consumption expenditure.

2. Demand for private investment

3. Demand for goods and services by the government

4. Net exports.

Since the determination of income and employment is to be studied in the context of two sector model, the third and fourth components of aggregate demand are not discussed in details. The two sectors taken are households and firms.

1. Demand for goods and services for private consumption is made by household sector. It is also called private final consumption expenditure and will be refered to as consumption expenditure. It must be kept in mind that the consumption expenditure we are discussing is ex-ante i.e. planned consumption expenditure.

This demand is influenced by many variables such as price of the goods or services, income, wealth, expected income, tastes and preferences of individuals and so on. Keynes formulated his fundamental Psychological Law of Consumption to lay down a behavioural rule to the process of consumption activity.

Keynes stated that “men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income”. This relationship between consumption and income is called the consumption function

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