Question

Draw a straight line consumption curve. From it derivate a saving curve. Explain the process of derivation. Show in this diagram.

(a) The point at which the average propensity to consume is equal to one.

(b) Any point at which the average propensity to save is negative.

Accepted Answer

The straight line consumption curve is provided below:

Derivation of the saving curve from the consumption curve is provided below:

The saving curve starts from the negative x-axis which is negative as much as the autonomous consumption is made.

Unless the consumption expenditure is greater than income, then the savings stay below the x-axis.

When the consumption expenditure is equivalent to the income level, then the entire income is consumed in an economy. At this point, the savings touch x-axis.

When the consumption expenditure stays larger than the income level, then the positive savings are made in an economy. The saving curve lies above the x-axis.

All points are made roughly on the cartesian plane of savings, then all points are adjoined which results in the construction of the saving curve.

The diagram of derivation is provided below:

(a) E is the point at which the average propensity to consume is one because, at this point, consumption equals income. Therefore, no saving is made at this point in the economy. The whole amount of income is consumed gives the unity value of the average propensity to consume.

(b) The savings remain negative between the points S and R in the saving graph. The reason is that the consumption expenditure remains less than the income levels between this range of S and R. Even the point S also resembles the negative saving as this saving meets the requirement of autonomous consumption.

Draw a straight line consumption curve. From it derivate a saving curve. Explain the process of derivation. Show in this diagram.

(a) The point at which the average propensity to consume is equal to one.

(b) Any point at which the average propensity to save is negative.

Important Questions on Determination of Income and Employment

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