of money that all entrepreneurs in an economy expect to receive from the sale of output produced by given number of labourers employed. The term ‘price’ refers to the amount of money received from the sale of output (sales proceeds). Hence, there are different aggregate prices for different levels of employment. The components of aggregate supply are : .
Aggregate (desired) consumption expenditure (C) . Aggregate (desired) private savings (S) . Net tax payments (T) (Total tax payment to be received by the government minus transfer payments, subsidy and interest payments to be incurred by the government) and . Personal (desired) transfer payments to the foreigners (Rf)(eg.
Donations to international relief efforts) Aggregate Supply = C + S + T + Rf = Aggregate income generated in the economy The following figure . shows the shape of the two aggregate supply curves drawn for the assumption of fixed money wages and variable wages. - - Theories of Employment and Income . .
Equilibrium between ADF and ASF Under the Keynes' theory of employment, a simple two sector economy consisting of the household sector and the business sector is taken to understand the equilibrium between ADF and ASF. All the decisions concerning consumption expenditure are taken by the individual households, while the business firms take decisions concerning investment. It is also assumed that consumption function is linear and planned investment is autonomous. There are two approaches to determination of the equilibrium level of income in Keynesian theory.
These are : . Aggregate demand – Aggregate supply approach . Saving – Investment approach In this chapter, out of these two, aggregate demand and aggregate supply approach is alone explained to understand the determination of equilibrium level of income and employment. N Nf AD AS E M R N x y Proceed and Cost Employment Figure.
. AGGREGATE SUPPLY CURVE Z curve is linear where money wages remains fixed; Z curve is non - linear since wage rate increases with employment. When full employment level of Nf is reached it is impossible to increase output by