Under employment equilibrium

Under employment equilibrium occurs when the level of effective demand in the economy is much below the level of full employment equilibrium. In this situation, there is a gap between the actual level of employment and the level of employment that would be achieved if all available resources were fully utilized.

1. Definition of under employment equilibrium:

Under employment equilibrium refers to a situation where the economy is not operating at its full potential due to insufficient demand. It occurs when there is a significant gap between the aggregate demand for goods and services and the economy's capacity to produce them.

2. Factors contributing to under employment equilibrium:

a) Insufficient aggregate demand: When the level of effective demand is low, businesses are not able to sell all of their products, leading to a decrease in production. This results in firms operating below their full capacity and therefore employing fewer workers.

b) Lack of investment: In an under employment equilibrium, businesses may be hesitant to invest in new projects or expand their operations due to the low demand for their products. This lack of investment further exacerbates the underutilization of resources.

c) Decreased consumer spending: When consumer confidence is low and people are hesitant to spend, it leads to a decrease in overall aggregate demand. This can be caused by factors such as high unemployment, low wages, or economic uncertainty.

3. Consequences of under employment equilibrium:

a) High unemployment: Under employment equilibrium is often associated with high levels of unemployment as businesses reduce their workforce to adjust to the lower demand. This leads to a waste of human resources and a decrease in overall economic output.

b) Low economic growth: When an economy is operating below its full potential, it experiences lower levels of economic growth. This is because the underutilization of resources results in a decrease in the production of goods and services.

c) Decreased living standards: Under employment equilibrium can lead to a decrease in living standards as individuals and households face reduced income and job insecurity. This can result in a decline in consumer spending, further perpetuating the cycle of low demand.

In conclusion, when the level of effective demand is much below the level of full employment equilibrium, the economy experiences under employment equilibrium. This situation is characterized by high unemployment, low economic growth, and decreased living standards. It represents a suboptimal utilization of resources and calls for policies to stimulate demand and promote economic growth.