EQUILIBRIUM LEVEL OF INCOME. Definition of income equilibrium. Equilibrium level of income maybe defined as a situation where the total amount people wish to save equals total investment of business units. It refers to a point at which aggregate savings equals aggregate investment!
Income equilibrium of demand and supply
At equilibrium level of income, there is a balance between demand and supply and there will be no tendency to increase or decrease output. The business sector is satisfied that the right volume of output has been achieved and there will be no tendency to alter it.
For equilibrium national incomes to maintained, the volume of total withdrawals from the circular flow of income must be equal to the total injections. For instance, total amount of savings must be equal to total value of investment goods and aggregate expenditure must be equal to total output.
Income earners (or households) can spend their income on consumption goods or save it. Hence, Y = C + S. on the hand, the firms can produce either consumption goods or investment goods. Hence, Y = c + I. Therefore, for Y to be constant, the level of savings (S) must be equal to investment (I). by implication, the amount of consumption goods and services produced by firms will be equal to the aggregate demand by the households.
capital consumption refers to the using up of existing capital stock and not replacing worn-out capital goods used in production. When fixed assets like building, motor vehicles, plants and machinery are being used and tear of these capital goods which reduce their value that is referred to in economic as consumption or depreciation. During the period of capital consumption enough saving are not made to maintain and place depreciating capital goods or assets. If a country finds it difficult to maintain its stock of capital, either by making provision for appreciation or her inability to replace worn-out on capital or consuming capital and this affects the standard of living of the people negatively.