In the short-run, the level of potential GDP (i.e., the aggregate value of goods that the economy can produce with the full use of its resource at their normal rates of utilisation is given. Production of goods and services within the upper limit given by the potential GDP is not constrained in any way. Thus, all producers and entrepreneurs can produced any level of GDP within the outer boundary marked by the potential GDP.
The actual level of GDP, under these conditions, would thus depend upon how much aggregate output the households and entrepreneurs as whole are willing to purchase or how much money they are willing to spend on aggregate output. Thus, on the demand side, aggregate expenditure of all the spending units in the economy on the total amount of goods and services will determine the aggregate production (GDP) in the economy.
On the other hand, within the range delimited by the potential GDP, the producers as a whole will like to produce that aggregate amount of output which at least covers their cost of production. Since, production is undertaken in anticipation of earning revenue, the amount of revenue that the producers as a whole expect from the sale of aggregate output will determine whether that output or GDP will be produced or not. If the expected revenue is higher, more will be produced, while lower revenue expectation would cause reduction in the aggregate output or GDP.
The equilibrium level of national income or GDP will be established at that level of national income where aggregate intended expenditure in the economy is equal to the aggregate expected revenue (which is the minimum necessary amount of revenue to cover the cost of production of that output) of the producers as a whole.
Aggregate intended Expenditure by all the purchasing units in the economy. = Expected Aggregate Revenue level at which that output will be produced in the company.
or
Aggregate Demand Price = Aggregate Supply Price
