Equilibrium levels of real national output — Edexcel A-Level Economics A
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Equilibrium levels of real national output explained
Equilibrium real national output occurs where planned aggregate demand equals planned aggregate supply, so there is no unplanned change in inventories and no pressure for output to move.
Read the full explanation
On a 45-degree line diagram, equilibrium is where the aggregate expenditure line crosses the 45-degree line; on an AD–AS diagram it is where AD intersects AS. If planned spending exceeds output, inventories fall unexpectedly, firms raise production and real output rises towards equilibrium. If planned spending is below output, unwanted inventories build up, firms cut production and real output falls. Equilibrium can sit below the full-employment level of output, so an economy may be in equilibrium with unemployed resources. The concept concerns real output, so it is measured in constant prices.
Your focus
- Define equilibrium real national output as the level where planned aggregate demand equals planned aggregate supply.
- Explain how unplanned inventory changes move output towards equilibrium.
- Distinguish equilibrium output from full-employment output using a diagram or example.
Equilibrium levels of real national output exam tips
Marking Points
- Defines equilibrium real national output as the level where planned aggregate demand equals planned aggregate supply.
- Explains that at equilibrium there is no unplanned change in inventories, so firms have no reason to alter output.
- Describes the adjustment process: excess demand causes inventories to fall and output to rise; excess supply causes inventories to rise and output to fall.
- Recognises that equilibrium can occur below full-employment output, so equilibrium does not imply full employment.
Examiner Tips
- 💡Use the inventory adjustment story to justify why output moves towards equilibrium, as it shows the mechanism rather than just the definition.
- 💡Check whether a diagram question asks for a movement along a curve or a shift of a curve before selecting an answer.
- 💡Remember that real output is measured at constant prices, so distinguish it from nominal output when an option mentions prices.
Common Mistakes
- Assuming equilibrium always means full employment: equilibrium real output can be below the full-employment level.
- Confusing a movement along the AD curve with a shift of AD: a change in the price level causes movement along AD, while a change in a component of spending shifts AD.
- Treating equilibrium as a fixed value that never changes: a shift in AD or AS establishes a new equilibrium level of real output.