Gr xiib & c -eco- ch-4-s4 (1)

Income Determination

2. Income Determination
Grade XII
Economics

3. Learning Objectives
•To understand the derivation of saving
function from consumption function
•To understand the derivation of consumption
curve from saving curve
•To calculate MPS and APS

4. Derivation of Saving Function
•S = Y –C and C = c̅+ bY
•∴S = Y –(c̅+ bY)
•S = Y –c̅–bY(Both c̅and bYare subtracted
from Y)
Rewriting the equation also in this way:
•S= –c̅+ Y –bY
•S = –c̅+ (1 –b) Y
•S= –c̅+ sYwhich is saving function.

5. Steps for Deriving Consumption Curve
•(i) At zero level of income, the
savings are which is the amount
of autonomous consumption at
Y= 0. So, -S= -C.Hence, the
consumption will start from the
point-C
•(ii) We draw a 45°line passing
through the origin which shows
that AS = Y. This is the income
line.
•(iii) Now, we draw a vertical line
from the point E, where saving is
zero. At zero level of saving, C = Y.
So, B is the break-even point.
•(iv) The consumption curve is
derived meeting E and B and
extending it forward.

6. Complete the Table
Income Consumption MPS APS
0 80 ___ ___
100 140 0.4 ……..
200 ….. …… 0
…… 240 …… 0.20
…… 260 0.8 0.35

7. Solution
Y C S ∆ S ∆Y MPS APS
0 80 -80 ____ ____ ____ ____
100 140 -40 40 100 0.4 -0.4
200 200 0 -40 100 -0.4 0
300 240 60 60 100 0.6 0.20
400 260 140 80 100 0.8 0.35

8. Calculate APC and APS
Y 100 200 300
C 80 120 160

9. Solution
Y C S APC APS
100 80 20 .8 .2
200 120 80 .6 .4
300 160 140 .53 .47

10. Calculate saving.
•If APC is .75, what is saving when income is
2000?

11. Solution
•APC + APS = 1
•So APS = 1-.75 = .25
•APS= S/Y
•0.25= S/2000
•S= .25 x 2000 = 500

12. Calculate
•If Y is 1400 and C is 900, what is APC?
•900/1400= .64
•If S is 500 and Y is 6000 what is APS?
•500/6000= 0.08
•If Y is 9000 and C is 7500 what is APS?
•1500/9000=.16
•If Y is 600 and S is 150 what is APC?
•450/600=.75
•When Y rises from 1000 to 1200, saving rises by 30. What is MPC and
MPS?
•MPS=30/200=.15 and MPC = .85

13. Review
•How do we derive consumption curve from
saving curve?

14. Recapitulation
•Saving function can be derived from
consumption function
•Consumption curve can be derived from
saving curve.