OUTPUT AND EMPLOYMENT
The equilibrium output in the economy also determines the level of employment, given the quantities of other factors of production (think of a production function at aggregate level). This means that the level of output determined by the equality of Y with AD does not necessarily mean the level of output at which everyone is employed. Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y(Income) and AD by itself does not signify full employment of resources. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It will lead to a rise in prices in the long run.
Level of employment is determined by which of the following?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Output Equilibrium.
Workers are hired to produce output, so the more an economy produces, the more people and other factors it employs. With the quantities of other factors of production given, the equilibrium output of the economy therefore also determines the level of employment, as a production function for the whole economy would show. Since that output is fixed by the equality of Y and AD, it is the level of demand that, through output, decides how many are employed.
Why the other options are incorrect
Option (2) Factor of Production — Incorrect. The quantities of the other factors are taken as given; with them fixed, it is output that decides how much labour is employed.
Option (3) Capital Employed. — Incorrect. Capital is one of those given factors; it does not by itself fix the level of employment.
Option (4) Availability of Raw Material. — Incorrect. Raw material is an input firms buy for the output they plan; it is output, decided by demand, that decides employment.
NCERT (2026-27): Introductory Macroeconomics — Chapter 4: Determination of Income and Employment
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