Page 4 - Home Assignment- AD and related concepts

• At 0 level of national income autonomous consumption is
0
therefore saving is - .
0
• At the breakeven point as C= , there fore saving=0 i.e. at point .
0
• By joining the points - and and extending the line we get the
0
0
savings curve.
EX: -The consumption function in an economy is = 225 + 0.75 . Find the
breakeven level of national income.

Answer: -

The equilibrium level of national income is determined at the point
where, =

=> 225 + 0.75 =

=> 225 = − 0.75

=> 225 = (1 − 0.75)

=> 0.25 = 225

225
=> = = 900
0.25
The breakeven level of national income is 900.

Propensity to Save: -

The proportion of total income or of an increase income that consumers tend
to Save rather than to consume is known as propensity to save. It is of two
types: -
1. Average Propensity to save (APS)

It refers to the ratio of savings to national income. APS =

2. Marginal propensity to Save (MPS)

It refers to the ratio of change in saving to change in national income.
∆
MPS=
∆
Example: -
With the increase in income of an economy from 1000crores to 2000crores the
savings increases from 500crore to 800crore. Find the values of APS and MPS
respectively.