The concept of equilibrium is very powerful for economists. When a sector of the economy is being analyzed, economists want to know what happens in that sector when no outside influences are disturbing it. For example, we can determine how much output is being produced in an economy by looking at the goods market. The figure in this exercise describes supply and demand behavior in the goods market. The Demand line represents how many goods and services are demanded in the economy at all levels of income. Naturally, as income rises people consume more goods and services, which is why the Demand line is upward sloping.
If a company produces output, it must pay income to the factors of production. And that is why the income in an economy is equal to the value of the production in an economy something we must always keep in mind. The level of income which is equal to output is represented by the Production line. The Production line is simply the 45-degree line remember, the 45-degree line represents the set of points on a graph whose values on the vertical axis are equal to their values on the horizontal axis. Let's look at the graph here to determine where the economy will naturally gravitate towards, i.e., what is the equilibrium level of income?
Grab the vertical tracer line over Y1 and move it to the left of Y on the horizontal axis.
Now let's use this graph to determine what happens to income when demand rises. Suppose there is an unexpected rise in the demand for goods and services. To graphically represent this change, grab and move the Demand line up. Notice the level of income does not respond immediately.