Question
Explain with the help of a diagram the concept of full employment equilibrium.
Solution
Full employment equilibrium. Full employment equilibrium refers to the equilibrium where all resources in the economy are fully utilised (employed). Simply put, when equilibrium between AD and AS takes place at full employment of resources, it is called full employment equilibrium. There are no unused resources. There is no involuntary unemployment. Aggregate demand is just sufficient to purchase the output which is produced with full utilisation (employment) of all available resources. It also indicates that in such a situation aggregate demand is neither in excess nor deficient but equal to supply at 'full employment level'. It is just equal to what it should be. This is an ideal situation which every economy desires to achieve and ensure its continued existence.
The situation of full employment equilibrium has been illustrated in Fig.(a). X-axis measures level of output and income whereas Y-axis measures aggregate demand (i.e., consumption demand + investment demand). AS is expressed by 45° line whereas the line AD represents aggregate demand. Both the curves intersect at point E which yields full employment equilibrium, because aggregate demand EM is equal to full employment level of output OM. (Remember, point E lying on 45° line is equidistant from both the axes.) Thus, economy is at full employment equilibrium at output level of OM as all those who are willing to work at existing wage rate have secured employment.
Fig.(a)
Note: Classicals believed that full employment equilibrium is a normal feature of a free economy. They asserted that aggregate supply would always be at full employment level. Since supply is perfectly price-inelastic, therefore,: Classical aggregate supply curve is a vertical straight line parallel to Y-axis at full employment level of output as shown in Fig.(a).
Thus Classical full employment equilibrium will occur at that point where aggregate demand j curve intersects this vertical aggregate supply curve.
The situation of full employment equilibrium has been illustrated in Fig.(a). X-axis measures level of output and income whereas Y-axis measures aggregate demand (i.e., consumption demand + investment demand). AS is expressed by 45° line whereas the line AD represents aggregate demand. Both the curves intersect at point E which yields full employment equilibrium, because aggregate demand EM is equal to full employment level of output OM. (Remember, point E lying on 45° line is equidistant from both the axes.) Thus, economy is at full employment equilibrium at output level of OM as all those who are willing to work at existing wage rate have secured employment.
Fig.(a)
Note: Classicals believed that full employment equilibrium is a normal feature of a free economy. They asserted that aggregate supply would always be at full employment level. Since supply is perfectly price-inelastic, therefore,: Classical aggregate supply curve is a vertical straight line parallel to Y-axis at full employment level of output as shown in Fig.(a).
Thus Classical full employment equilibrium will occur at that point where aggregate demand j curve intersects this vertical aggregate supply curve.
