Aggregate Demand/Supply and Full Employment Level in

Aggregate Demand/Supply and Full Employment Employment level in any country is dependent upon important economic factors or elements including production, demand, supply, consumption, inflation etc. Employment can never be increased or decreased without it producing some effect on these economic factors. In their words, changes in these factors are what lead to increase or decrease in employment level. For example in any country we cannot expect to increase employment level without taking into account production of goods and services, demand for those goods and supply of the same.

When employment level in the country is low and the government wants to achieve full employment, it is important to study the economic factors of aggregate demand and supply as they play the most crucial role in determining the level of employment in a country. Aggregate demand is the sum total of demand for goods and services in a country. In any country, there exist more than one source of demand.

It is not the general public that seeks goods and services but the government and international buyers are also important sources of demand because they affect production level in a country. In other words aggregate demand is defined as "the total level of demand in the economy. It is the total of all desired expenditure at any time by all groups in the economy. The main groups who spend are consumers (consumption), firms (who spend on investment), government (government expenditure) and overseas (exports).

Total aggregate demand is therefore: AD = C + I + G + (X-M) where consumption expenditure investment expenditure government expenditure M) = net exports (exports - imports)" (Economics Glossary: Reference 1) Aggregate demand and aggregate supply are distinct but interrelated concepts. Aggregate supply is the sum total of supply of goods or service at various price and demand levels in a country. When demand for some good increases, supply is usually increased or else inflation is likely to set in.

To avoid excessive inflation, production is increased to meet the new demand level in the country. Aggregate supply is thus "the total quantity supplied at every price level. It is the total of all goods and services produced in an economy in a given time period." (Reference 1) With increase in demand for goods and services, supply increases which an increase in production level results. However to meet this new supply need, firms will have to invest more resources including capital and labor.

This leads to higher employment level as more job opportunities are created and more people are absorbed by the industries. Full employment is attained when everyone who is willing and able to work can find a job in the country. However there might still be some left out of the job market because of seasonal employment still full employment is commonly known as "a situation where the labor market has reached a state of equilibrium - i.e.

when those in the active labor force who are willing and able to work at going wage rates are able to find work. At this point the remaining unemployment would essentially be frictional." (Reference2) Full employment is ideally achieved when aggregate demand and aggregate supply are in complete harmony. This means when production reaches its maximum and can satisfy the rising demand completely, this is ideally the situation when.