Class 12 Macro Economics Notes · CBSE

AD-AS Approach

AD-AS Approach — learn how equilibrium output is determined using the Aggregate Demand and Aggregate Supply framework with diagrams. CBSE Class 12 Macroeconomics notes.

Last updated: 16 Aug 2026

Notes

Components of AD and AS

Aggregate Demand (AD)

Consumption expenditure (C): Varies directly with income; consumption rises as income increases.

Investment expenditure (I): Independent of income level (autonomous).

AD = C + I

Aggregate Supply (AS)

Total output of goods and services in national income.

Depicted by a 45-degree line — points where planned expenditure equals total income/output.

AS = C + S

Equilibrium Schedule

Amount in Crores. Equilibrium at Y = 400 where AD = AS = 400.
Employment (Lakhs)	Income (Y)	Consumption (C)	Saving (S)	Investment (I)	AD (C+I)	AS (C+S)	Remarks
0	0	40	-40	40	80	0	AD > AS
10	100	120	-20	40	160	100	AD > AS
20	200	200	0	40	240	200	AD > AS
30	300	280	20	40	320	300	AD > AS
40	400	360	40	40	400	400	Equilibrium (AD=AS)
50	500	440	60	40	480	500	AD < AS
60	600	520	80	40	560	600	AD < AS

Diagrammatic Representation

AD-AS Equilibrium

AS (45°)

AD (C+I)

Key points from the diagram

E is the equilibrium point: desired spending on C+I exactly equals total output
OY is the equilibrium level of output
Equilibrium income = 400 crores where AD = AS = 400 crores

Effective Demand:The level of AD which becomes ‘effective’ because it is equal to AS.

Adjustment When AD > AS

When planned spending (AD) is more than planned output (AS), the economy adjusts through inventory changes:

AD > AS

The (C+I) curve lies above the 45-degree line

Inventory Falls

Planned inventory falls below desired level — firms experience reduced stock

Increase Production

Firms increase production to restore inventory

Income Rises

Increased production leads to increased employment and output, raising income

Equilibrium

Process continues until AD = AS at output level OY

Planned Inventory = unsold stock anticipated based on expected sales. Unplanned Inventory = unanticipated changes due to unexpected sales levels.

Adjustment When AD < AS

When planned spending (AD) is less than planned output (AS), the reverse adjustment occurs:

AD < AS

The (C+I) curve lies below the 45-degree line

Inventory Rises

Planned inventory rises above desired level — unwanted accumulation of unsold goods

Decrease Production

Firms decrease production to clear inventory

Income Falls

Decreased production leads to decreased employment and output, lowering income

Equilibrium

Process continues until AD = AS at output level OY

Equilibrium may or may not be at full employment level. Equilibrium is possible even below full employment — this was Keynes’s revolutionary insight.