Equilibrium of Income, Consumption And Investment - SS3 Economics Lesson Note

In the equation Y = C + I, Y represents the level of income in the economy, C represents the level of consumption expenditure, and I represents the level of investment expenditure.

To derive the equilibrium of income, consumption, and investment, we need to assume that the economy is in equilibrium, where the level of output (Y) is equal to the level of expenditure (C + I). This means that there is no excess supply or demand in the economy.

In other words, at equilibrium, the total income generated by the economy is equal to the total expenditure on consumption and investment. This can be expressed as:

Y = C + I

We can also express consumption as a function of income, where consumption (C) depends on income (Y) and some other factors, such as interest rates, consumer confidence, and wealth. This can be expressed as:

C = f(Y)

Substituting this expression for consumption into the equilibrium equation, we get:

Y = f(Y) + I

This equation represents the equilibrium condition of income, consumption, and investment in the economy. At equilibrium, the level of income that is generated by the economy is such that the total expenditure on consumption and investment is equal to it.

 

To solve for the equilibrium level of income, we can use algebra to rearrange the equation as follows:

Y - f(Y) = I

This equation represents the difference between the level of income and the level of consumption at any given point in time. The difference between these two variables is equal to investment (I).

To find the equilibrium level of income, we need to find the value of Y that makes the left-hand side of this equation equal to the right-hand side. This can be done by trial and error or by using mathematical methods such as graphical analysis or calculus.

However, in reality, the equilibrium level of income is determined by a range of factors, including government policy, consumer behaviour, business investment decisions, and international trade. These factors can shift the consumption and investment functions, causing the equilibrium level of income to change over time.