Concept of Goods Market And Equilibrium Level of income Determination in two sector economy

Concept of Goods market:

Goods market ,also known as product market refers to the process and structure of buying and selling goods and services produced in an economy. For example, market for buying and selling of final products such as chocolate, clothes, bread,etc.

Income Determination Model in a Two-Sector Economy:
The equilibrium level of income in the two-sector economy is determined at the point where aggregate demand (AD) is equal to aggregate supply (AS). It can be written as:

AS = AD
Or, Y = C + I       ......... (i)
Or, Y = a + bY + I
Or, Y- bY = a + I
Or, Y(1 - b) = a +I
Or, Y=(a + I)/(1-b)       .........(ii)

On the basis of this equation, we can conclude that the equilibrium level of income in the two-sector economy is the sum of all autonomous expenditures (i.e., a + I) time the value of multiplier(1/(1-b)).

This model can be explained by the help of the following figure:

Aggregate supply (AS) of final product is GDP or Y. Total income is either consumed or saved i.e., Y = C + S. Thus, AS curve is a 45° line showing Y = C+S at all level of income.

Aggregate demand (AD) for final product is aggregate expenditure (AE) which consists of consumption expenditure and investment expenditure. i.e., AD = AE =C+I
Consumption (C) curve is upward slopping started from the vertical axis above the origin implying that consumption is not zero at zero level of income. Here, investment refers to autonomous investment. Hence, AD curve is parallel to consumption curve.

In the figure, C+ I curve represents AD and C+S curve represents AS. Point E is the equilibrium point where AD curve intersects AS curve. Thus, OY is the equilibrium level of output. At any level of output more than or less than OY there is no equilibrium in the economy. At any level of output less than OY, AD>AS since C+ I curve lies above C+ S curve. When AD> AS, the firms will be induced to expand their output of goods at the desired levels. This process of expansion in output under the pressure of excess demand will continue till national income is reached at OY.
On the contrary, if the level of income is greater than OY then AD <AS. This will induced the firms to reduce total output or national income until the level OY is reached. Thus, OY is the equilibrium level of national income.
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