Class 12 Macro Economics Notes · CBSE

Equilibrium Output at Fixed Price

Equilibrium Output at Fixed Price — understand how equilibrium output is determined when prices are assumed to be fixed in the short run. CBSE Class 12 Macroeconomics notes.

Last updated: 16 Aug 2026

Notes

The Fixed Price Model Derivation

Under fixed price model, AS is infinitely elastic, so equilibrium is determined solely by AD. Here is the step-by-step derivation:

AD Function

AD = C + I

Consumption Function

C = \bar{c} + b(Y)

Where: c̄ = Autonomous Consumption, b = MPC (Marginal Propensity to Consume), Y = Income

Autonomous Investment

I = \bar{I}

Substituting

AD = \bar{c} + \bar{I} + b(Y)

Let A = c + I

AD = \bar{A} + b(Y)

Equilibrium: AD = Y

Y = \frac{\bar{A}}{1-b}

Equilibrium income = autonomous expenditure multiplied by the multiplier 1/(1-b).

Final Formula

Equilibrium Income

Y = \frac{\bar{A}}{1-b}

Diagrammatic Shift in AD

AD Shift and Multiplier Effect

AS (45°)

AD₀

AD₁

Explanation

Initial equilibrium at E: AD₀ intersects 45-degree line at income OY
When autonomous expenditure increases from A₁ to A₂, AD shifts upward to AD₁
At initial income OY, excess demand = vertical distance EG (from E on AD₀ to G on AD₁)
New equilibrium at E₁ with higher income OY₁
Increase in income (ΔY = 300) > initial increase in autonomous expenditure (ΔA = 60) → multiplier effect

Solved Example 1

Solved Example

Problem

Estimate the value of ex-ante AD, when autonomous investment and consumption expenditure (A) is 850 crores and MPS is 0.2 and level of income is 8300 crores. (CBSE, Sample Paper 2018, Delhi & All Comptt. 2022 (II))

Solution

AD = 7,490 crores

Solved Example 2

Solved Example

Problem

On the basis of following information, identify whether the economy is in equilibrium or not: Autonomous Consumption and Investment Expenditure (A) = 7,500 crores; MPS = 0.2; National Income (Y) = 74,000 crores.

Solution

The economy is NOT in equilibrium. AD (66,700) < Y (74,000).