What is Underemployment Equilibrium Clas 12

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Looking for What is Underemployment Equilibrium level, its meaning, definition, concepts and diagram, examples as per the syllabus of class 12 CBSE Board and other States Board.

I have explained this topic in detail.

See, this topic is concerned with Determination of Income and Employment Chapter of Macroeconomics class 12

Let’s discuss.

What do you mean by Under Employment Equilirbium Level (class 12)

See, Equilibrium here means, the Determination of Income Equilibrium in the short run.

As per the Keynesian Economy theory. Equilibrium of Income can be at full employment, underemployment, and at an overfull employment level.

Note:- Income Equilibrium is attained when the aggregate demand is equal to aggregate supply.

When we talk about Equilibrium of Income and underemployment level. Here we mean all human labour who is capable and willing to work, is not employed at AD = AS.

it is a situation of the presence of involuntary unemployment.

In other words, we can say AD is not enough sufficient to force producers to produce goods by fully utilising the available resources.

In other words, we can say AD < AS at full employment level

Understand Underemployment Equilibrium level with simple example

Let’s suppose, in an economy, there are 100 labours. 1 labour is capable of producing 1 unit of goods.

Thus, 100 units of products can be produced if all 100 labours are employed.

If 100 labours are employed we can produce 100 units in an economy. we can say the economy is fully utilising its resources or it is a situation of full employment level.

If we talk about in Aggregate supply terms. The above-said economy can supply a maximum of 100 units of products at the full employment level.

But, in the open market Aggregate demand is more effective than Aggregate supply. This is the market demand of a product, that decide What quantity of a good a producer would produce.

But, if the aggregate demand in the market is of 80 units. The producer is also bound to produce only 80 products.

Because if he produces 100 units. The extra 20 units will keep lying in the stock and it will result in losses.

Tell, How many labours he will hire.

Yes, only 80 labour. 20 labour in the above-said economy will remain unemployed.

However, they want to work. But Aggregate demand in the market is not enough effective to force producers to produce 100 units.

This is the situation of Equilibrium of income at the underemployment level.

Here, AD is 80. AS has to be kept at level 80 by the producer.

Because if he produces 100 units. The extra 20 units will keep lying in the stock and it will result in losses.

Thus we can say

AD < AS at the full employment level

Definition of Income Equilibrium at underemployment level

It refers to a situation when the aggregate demand is equal to the aggregate supply when the resources are not fully employed

Sandeep Garg

Underemployment equilibrium refers to that situation in the economy when AS = AD (or S = I) but without fuller utilisation of resources. Accordingly, there is unutilised capacity or excess capacity (or unemployment) in the economy even in a state of equilbrium.

TR. Jain

Diagram & Explanation of Income Equilibrium at underemployment level

Here is the diagram

Explanation of the Diagram

In the above figure, AD1 = AS at point F, which is the point where all resources are not fully employed.

OQ1 (AS) is less than OQ (AS at full employment level). Thus F signifies, the underemployment equilibrium.

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