Determination of Income and Employment | Class 12 Economics Notes
By ConceptScroll Team · Published on 17 July 2026 · 2 min read
Determination of Income and Employment – this guide gives you a concise, exam-ready overview of Determination of Income and Employment from Class 12 Economics, written by ConceptScroll editors and reviewed against the latest NCERT textbook.
4.2 Determination of Income in Two-Sector Model
In a two-sector economy without government, aggregate demand (AD) is the sum of consumption (C) and investment (I). Using the consumption function C = C̄ + cY and autonomous investment I = Ī, aggregate demand can be written as AD = C̄ + Ī + cY. Equilibrium in the final goods market occurs when planned output (Y) equals planned aggregate demand: Y = C̄ + Ī + cY. Rearranging, Y - cY = C̄ + Ī, or Y(1 - c) = C̄ + Ī. Defining total autonomous expenditure as Ā = C̄ + Ī, equilibrium income is Y = Ā / (1 - c). This equation shows that equilibrium income depends on autonomous expenditure and the marginal propensity to consume. It is important to distinguish this equilibrium condition from the accounting identity where ex post output equals ex post consumption plus investment. If ex ante demand falls short of planned output, unintended inventory accumulation occurs, signaling disequilibrium. The government sector can be introduced by adding government expenditure (G) and taxes (T), modifying disposable income and aggregate demand accordingly, but is ignored here for simplicity.
📊 Diagram: Reprint 2026-27
🧪 Activity: No specific activity mentioned in this subsection.
🔗 Connection: Leads to the determination of equilibrium income in the short run with fixed price level in section 4.3.
Frequently asked questions
2. Consumption is not a function of
Autonomous investment
6. If your income is zero in a certain period and you use your past savings to buy certain minimum consumption items in order to survive. This is referred to as _______ consumption
Autonomous consumption
5. Which of the following statement is false with respect to equilibrium of an economy in different time periods?
Prices are assumed to vary only in the short run
4. Which of the following is false when the economy is in equilibrium?
None of the given options
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- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.
- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.
- बाज़ार संतुलन | Class 12 Economics Notes
Clear NCERT-aligned notes on बाज़ार संतुलन for Class 12 Economics.