Sponsor Area

Determination Of Income And Employment

Question
CBSEENEC12013459

Outline the steps required to be taken in deriving saving curve from the given consumption curve. Use diagram.

Solution


In part A, CC curve shows consumption function corresponding to each level of income whereas 45o line represents the income. Each pointy on 45o line is equidistant from X axis and Y axis. C curve intersects 45o line at point B at which BR=OR i.e. consumption = income. Therefore, point B is called break-even point showing zero saving.

It emphasizes that saving curve must intersect x-axis at the same income level where consumption curve and 45o line intersect. Further, it will be seen that to the left of point B, consumption function lies above 45o line showing that consumption is more than income, i.e. negative saving and to the right of point B, consumption function lies below 45o line showing positive saving.

In part B, we derive saving function in the form of saving curve. In part A, the amount of saving is the vertical distance of Part A representing saving/ dissaving and by joining them, we derive a saving curve. For instance, at 0(Zero) level, of income in Part A, vertical distance OC is plotted as OS1 below X axis in Part B.

Similarly, At OR level of income in Part A, vertical distance at point B being nil is shown as point B1 on X axis in lower part of the figure. Likewise, LM vertical distance of part A is shown as L1M1 in part B. By joining points S, B1 and L1 in the lower segment, we get saving curve. Thus saving curve or function is diagrammatically derived from consumption curve or function.