Class 12 Macro Economics Notes · CBSE

Types of Equilibrium

Types of Equilibrium — learn about under-employment equilibrium, full-employment equilibrium, and inflationary gap. CBSE Class 12 Macroeconomics notes.

Last updated: 16 Aug 2026

Notes

Three Types of Equilibrium

Classical economists believed equilibrium always occurs at full employment. Keynesian theory allows three possibilities:

Full Employment Equilibrium

AD = AS at the full employment level of output. All available resources are fully utilized.

The economy produces at maximum capacity — every factory runs at 100%, every worker who wants a job has one.

Underemployment Equilibrium

AD = AS at a level where resources are not fully employed. Output is below full employment level.

Factories run at 70% capacity, some workers are idle — the economy settles at a level below its potential.

Over Full Employment Equilibrium

AD = AS at an output level beyond full employment. Cannot be sustained without inflation.

Everyone already works overtime, but demand keeps rising — prices spiral instead of output increasing.

Full Employment Equilibrium

AS (45°)

AD (C+I)

Explanation

E is the full employment equilibrium: AD (EQ) = full employment output (OQ)
At OQ, all those willing to work at prevailing wage rate find employment
No involuntary unemployment exists

Underemployment Equilibrium

AD = 60 + 0.8YEquilibrium Y* = 300.0

A = 60

Drag the slider to change autonomous expenditure A and watch the AD curve shift, the gap change, and the equilibrium move.

AS (45°)

AD (Full Employment AD)

AD₁ (Actual)

Explanation

The AD curve corresponding to full employment intersects the 45° line at point E, at the full employment output OQ
The actual AD₁ curve intersects the 45° line at point F, at output OQ₁
Since OQ₁ < OQ, the economy settles below full employment — point F signifies underemployment equilibrium

Over Full Employment Equilibrium

AD = 150 + 0.8YEquilibrium Y* = 750.0

A = 150

Drag the slider to change autonomous expenditure A and watch the AD curve shift, the gap change, and the equilibrium move.

AS (45°)

AD (Full Employment AD)

AD₁ (Actual)

Explanation

The AD curve corresponding to full employment intersects the 45° line at point E, at the full employment output OQ
The actual AD₁ curve intersects the 45° line at point G, at an output level beyond OQ
Actual output cannot rise beyond full employment, so excess demand between OQ and G creates inflationary pressure instead of additional real output — point G signifies over full employment equilibrium

Inflationary Pressure and Fixed Price Analysis

Inflationary Pressure: Over Full Employment Equilibrium signifies planned AD = AS at a level higher than full employment. However, actual output cannot increase beyond full capacity. Any increase in AD beyond full employment output leads to an increase in the general price level (inflation), because increased demand cannot be met by increased supply. There is no real increase in output, only a rise in prices.

Short-run Fixed Price Analysis: In the short run, prices are assumed fixed because:

Producers take time to adjust prices; they first update production plans
Individual firms are too small to influence market price
Prices remain constant in the short run and vary only in the long run

Effective Demand Principle: When AS is infinitely elastic at fixed price, equilibrium is solely determined by AD. Effective Demand = total demand met by corresponding supply at fixed price.