This presentation describes the Keynesian model of the economy after the 1929 depression. Aggregate demand aggregate supply with equilibrium and Factors affecting the theory and criticism to Keynesian theory.

1. Aggregate Demand And Aggregate
Supply-Income Analysis
Presented By:
Ayushi Tripathi
VT Karthik
Ansula Gupta
Pratik Milan Saho
Lawrence Piyush Rozario

2. Keynesian Theory of Income Determination
• As per the Keynesian theory – In the short run, National income and employment is
determined by aggregate demand and supply in the country.
• The equilibrium of the 2 can be termed as national income i.e. effective demand point.
There are two approaches to determine income and output:
1. Aggregate Demand - Aggregate Supply Approach
2. Saving – Investment Approach
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3. Aggregate Demand -
Aggregate Supply
Approach

4. Aggregate
Demand
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Aggregate demand refers to the sum of expenditure
households, firms and the government is undertaking
on consumption and investment in an economy.
Increase in the level of employment raises the
expected proceeds and vice versa.
AD curve would be positively sloping to indicate
increasing output w.r.t increasing employment.
Aggregate Demand = Consumption of Goods and
Services + Investment (Demand for Capital Goods).
AD = C+I

5. Aggregate Demand
Function
• Aggregate Demand
increases with the number
of workers employed
• ADF curve becomes
perfectly elastic as the
economy reaches near full
employment
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6. Aggregate Supply
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It refers to the flow of output produced by the employement of workers in an economy
in the short run.
It can also be refers to the final output valued at factor cost.
It Refers to the minimum amount of money the entrepreneur expects to receive to
cover costs of output produced.
AS curve is positively sloped to signify direct proportionality between level of
employment and level of output.

7. Aggregate Supply
Function
• Aggregate Supply Price
increases with the increase
in number of workers
employed.
• ASF is a rising curve and at
full employment it
becomes perfectly
inelastic.
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8. Determination of
equilibrium level of
employment
• At OL, ADF > ASF
(Expansionary Tendency)
• Beyond OL, ADF < ASF
(Contractionary Tendency)
• At OL, ADF = ASF ( Point of
effective demand)
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9. Role of Fiscal Policy in
achieving Full
Employment
• Full employment can be
achieved by removing the
gap between ASP and ADP.
• The gap is filled by shifting
ADF upward to ADF’
• Now E’ is the new
equilibrium point for full
employment.
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10. Saving – Investment
Approach

11. What is
saving?
• Saving is income not spent, or deferred
consumption. ... In terms of personal finance
• saving generally specifies low-risk preservation
of money, as in a deposit account, versus
investment, wherein risk is a lot higher;
in economics more broadly, it refers to any
income not used for immediate consumption.
• Savings = National Income - Consumption
• S = Y – C

12. What is
investment?
• an asset is bought, or that money is put into a
bank to get a future interest from it.
• Investment is total amount of money spent by a
shareholder in buying shares of a company.
• In economic management
sciences, investments means longer-term
savings.
• National Income = Consumption + Investment
OR
• Y = C + I

13. Continuation.
• More goods are produced and sold, creating
growth in the economy.... Banks use these
deposits to start another round of lending and
even
more economic growth. Saving Can Help You
Reach Important Goals.

14. Effect of
savings and
investment
• if investment is less than intended saving, it
means that less amount of money has been put
into the income stream than has been taken out
of it. The result would be that national income
would decrease.

15. Saving-
Investment
Equilibrium
• In a two-sector model, equilibrium occurs when
income received equals aggregated desired
expenditures (i.e., Y = C + I). An alternative way
of describing how national income is
determined is to focus on saving and
investment.

16. Savings =
Investment
• income = consumption + saving . . . (1)
With no government purchases or net exports, the
components of aggregate expenditures that firms can
produce only two kinds of goods: consumer goods and
investment goods.
Thus, output Y can be broken into two
components:
• Y = consumption + investment . . . (2)
These two identities can be combined to form a new one.
Since the value of national output equals national income
• Y = income . . . (3)
We can use tire right-hand side of (1) and (2) to
get:
• Consumption + savings = Consumption + investment . .
. (4)
By subtracting consumption from both sides of
the equation, we get:
• Saving = investment . . . (5)

17. • According to the Keynesian
theory saving must equal
investment, this is a simple
matter of definition and is
known as saving-investment
equality.
• The desired investment
function is horizontal because
in Keynes’ model all investment
is autonomous, i.e., is assumed
to be independent of national
income. National income
equilibrium occurs at point E
where the desired saving
function intersects the desired
investment function.
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18. Effective, Latent and Derived Demand
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1. Effective
Demand
3. Derived
Demand
2. Latent
Demand
• Effective demand refers to the ability of
consumers to purchase goods at different
prices.
• In Keynes’s macroeconomic theory,
effective demand is the point of
equilibrium.
Latent Demand is the willingness to
purchase goods is limited by the
inability to afford it – or lack of
knowledge.
Derived Demand occurs
when there is demand for a
good or service depending
on demand for an
intermediary

19. Factors Affecting Effective Demand
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CREDIT
AVAILABILITY
Price - Increase and Decrease in price of a product can
affect the buying ability
Income - A rise in income will tend to
cause rising demand.
Availability of credit - If consumers and firms are able to
borrow, then they have an effective demand to buy or invest.
If credit is constrained, their effective demand is limited by the
lack of access to credit.

20. Importance of Effective Demand
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Determinant of
Employment
Capitalistic EconomySay’s Law falsified
• In rich community the
gap between income and
expenditure is high.
• If the gap is not filled
with investment, It will
lead to unemployment.
• According to the concept
of effective demand,
whatever is produced in the
economy is not
automatically consumed.
• It is partly saved.
• So the concept of full
employment is not possible.
As effective demant
increses Employment
also increses

21. Criticism Of Keynesian Theory
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From Mid 1970s onwards
Keynesian theory came under
sharp critism from monetarists.
Monetarists says that Keynes put
more emphasis on determinats
of aggregate demand and to
greater extent ignored the
determinats of aggregate suppy.
The General Theory of Keynes is
applicable only to developed
nations. The concepts aren’t
useful for policy purposefor less
developed countries