Determinants of Equilibrium Income

Planned Savings and Planned Investment are the two major determinants of equilibrium income. When planned savings and planned investment are equal, the economy is at equilibrium.

Planned Savings

Planned savings refer to the amount of money that individuals, businesses, and government intend to save rather than spend. When people save more, they spend less, which means that the demand for goods and services decreases. This leads to a decrease in output and income. Therefore, planned savings have a negative effect on equilibrium income.

Planned Investment

Planned investment refers to the amount of money that businesses plan to invest in the economy. Investment is an injection into the economy, which means that it increases output and income. Therefore, planned investment has a positive effect on equilibrium income.

Equilibrium Income

Equilibrium income is the level of income at which aggregate demand equals aggregate supply. It is the level of income at which there is no tendency for the economy to move away from this level.

Planned Savings = Planned Investment

When planned savings are equal to planned investment, the economy is at equilibrium. At this point, there is no tendency for the economy to move away from this level of income.

If planned savings are greater than planned investment, then there is a surplus of savings in the economy, which leads to a decrease in output and income. On the other hand, if planned investment is greater than planned savings, then there is a shortage of savings in the economy, which leads to an increase in output and income.

Conclusion

In conclusion, planned savings and planned investment are the major determinants of equilibrium income. When they are equal, the economy is at equilibrium. If there is a surplus of savings, then output and income decrease, and if there is a shortage of savings, then output and income increase.

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