Determinants of consumption function and savings function - class-XII

The theory of consumption is studied through the indifference map.
The consumption function is created on the basis of the wants of the consumers (and plotted as an indifference curve) and the budget line represents the ability to pay and depends on the consumers' income. 

Break even point refers to the point where the income=consumption or savings= 0. It is the point where the consumption curve intersects the 45 degree line. 

APC refers to Average Propensity to Consume which
defines the amount of consumption in every 1 rupee of income for all level of
income which can never be negative because consumption is never negative owing to the very existence of life and basic needs to satisfy it. 

APS refers to
Average Propensity to save which defines the amount of savings in every 1 rupee
of income for all level of income which can never be more than one as
savings can be negative in situations when consumption is more than the national income leading to dis-savings in the economy i.e. before the break even point when APS<0.

Aggregate demand curve is upward sloping showing a positive relation between level of income and overall expenditure in the economy. The curve intercepts on Y-axis because even at zero level of income, there is some consumption which is required for the very existence of life. 

The aggregate demand in two sector economy only includes the expenditure made by the consumer sector and the producer sector. The expenditure by the government sector and net exports are not included in the two sector economy. 

APC refers to
Average Propensity to Consume which defines the amount of consumption in every
1 rupee of income for all level of income which can never be negative
because consumption is never negative owing to the very existence of life and
basic needs to satisfy it while it can be more
than one as long as consumption is more national income, i.e. before the
break-even point, APC > 1. 

APC refers to Average Propensity to Consume which
defines the amount of consumption in every 1 rupee of income for all level of
income. Therefore,

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

The consumption function is C= 100+0.75Y where Y is the income at different level in the economy. 

Income = consumption + savings 

=> Savings = Income - consumption 

=> S = Y- C

=> S = Y - ( 100 + 0.75Y)

=> S = Y- 100 - 0.75Y

=> S = - 100 + Y ( 1 - 0.75) 

=> S = -100 + 0.25Y 

Therefore, the saving function is S= -100 + 0.25Y  where autonomous savings= -100, MPS= 0.25 and Y is income at all levels. 

Aggregate Demand refers to
the desired level of expenditure in the economy during an accounting year. It
is what people wish to spend on the purchase of goods and services during an
accounting year.

Saving function is S= s + M(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and M= income. Comparing it to S=−40+0.4(M), MPS= 0.4.

We know that, 

MPS + MPC = 1 

=> MPC = 1 - MPS 

=> MPC = 1 - 0.4 

=> MPC = 0.6 

Therefore, MPC is 0.6. 

Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value. 

S= s + Y(1-b) where s=autonomous
savings, (1-b)= marginal propensity to save, and Y= income.

Average Propensity to save defines the amount of savings in every 1 rupee of income for all level of
income which can be less than zero at income levels which are lower than
the break-even point where savings lies below the x-axis indicating that consumption is greater than income that leads to dissavings in the economy. 

APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income. It is expressed as the ration of saving to income in an economy. 

Average propensity to save = S/Y where S is the savings and Y is the income in the economy. 

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

Marginal propensity to save = ΔS/ΔY where ΔS is the Change in savings and ΔY is the change in income in the economy. 

APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income. 

Average propensity to save = S/Y where S is the savings and Y is the income in the economy. 

Savings refers to the proportion which is not utilized at present and is saved for future. It is a function of income where,

Savings refers to the amount of the income which is not spend on the consumption of the commodities. It is the distance between the consumption curve and the income curve after the intersection. 

False. 

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

If income in terms of wage rate increases, then consumption expenditure also increases which is called the wage-price spiral where the wages are increased due to excessive price in the economy and price in increased due to excessive wage and consumption demand in the economy.