# How to Calculate the Equilibrium Level of Income

### Supply and demand for the macro and micro economy.

Sep 11, 2015 at 10:01PM

The equilibrium level of income is when an economy or business has an equal amount of production and market demand. The definition is a bit abstract, so let's use a simple example of a manufacturing business to explain what it actually means.

The equilibrium level of income is the point at which a business is able to sell all of the goods it planned to. Pretty simple.

The company produces its product to that level, and then sells exactly the same amount. The company's output -- its production -- is equal to the consumer demand to buy the product.

That micro example is pretty easy to understand, and we can use that simplicity to expand our understanding to the macroeconomic level. At the national level, gross domestic product, or GDP, represents the business manufacturing its products. All the businesses, consumers, investors, and government spending in the economy represent the consumers buying those products.

An economy is said to be at its equilibrium level of income when aggregate supply and aggregate demand are equal. In other words, it is when GDP is equal to total expenditure.

How to calculate the equilibrium level of income
To calculate the equilibrium level of income, you'll need a few economic figures to plug into a formula. This exercise can quickly become quite complex when factoring in government spending, inflation, GDP, and a myriad of other macroeconomic calculations.

Most simply, the formula for the equilibrium level of income is when aggregate supply (AS) is equal to aggregate demand (AD), where AS = AD.

Adding a little complexity, the formula becomes Y = C + I + G, where Y is aggregate income, C is consumption, I is investment expenditure, and G is government expenditure.

Using this formula, an analyst can observe how a change in any of the factors will impact the level of income. For example, if government spending increases, and all other expenditures stay constant, the level of aggregate income must also increase to maintain the equilibrium level of income.

Why does the equilibrium level of income matter?
The calculation of the equilibrium level of income is normally a task for economists, but the application and understanding of this concept has merit for investors of all walks. Let's break it down.

When aggregate demand exceeds aggregate supply, businesses will increase their output. Think back to our manufacturing business: If their customers are making more and more orders, the company will increase their production -- the output. Why? Because there's more money to be made!

That process leads the company to buy more raw materials, invest in new equipment, and perhaps even hire more workers. The aggregate effect is very positive for the economy.

In the inverse situation, when aggregate demand falls short of aggregate supply, the manufacturing company builds too much product and can't sell it all. The company's inventory will accumulate in the warehouse, which increases its overhead expenses, reduces its cash, and hurts profits. The company must decrease its production, potentially downsizing its employment base or cutting prices to unload the excess inventory. When that happens to businesses nationally, it's clearly a bad thing for the economy.

When output and demand are in the balance though, the company can continue humming along, manufacturing its products, selling them, and maintaining prices, employment, and profits.

Understanding this dynamic is helpful in understanding the business cycle at a macro level, just as it's helpful in understanding how a specific company's business prospects change over time. It's supply and demand, applicable to both the micro and the macro.

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# 4 in 5 Americans Are Ignoring Buffett's Warning

### Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.

The catch was: Attendees weren't allowed to record any of it. No audio. No video.

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than \$2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend.

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity.

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands."

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.