If the supply of final goods is taken to be perfectly elastic at a constant price, aggregate output is determined solely by __________. This is known as the __________.
Which of the following options fills the blanks correctly?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → aggregate demand; effective demand principle
In the short run the price is fixed, and producers will supply any amount at that price. So output is set by how much is demanded. This idea is called the effective demand principle.
Option (1) aggregate supply; effective demand principle — Incorrect. Supply only follows demand here, so it cannot decide output.
Option (3) aggregate demand; parametric shift — Incorrect. A parametric shift is the movement of a line when its slope or intercept changes. It is not this principle.
Option (4) the rate of interest; effective demand principle — Incorrect. The rate of interest is held constant in the short run, so it does not decide output here.
NCERT (2026-27): “Summary When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante consumption, ex ante investment, government spending etc. The rate of increase in ex ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle.” |