question_answer

Given saving curve, derive consumption curve and state the steps in doing so. Use diagram.

Answer:

Derivation of the consumption curve from saving curve:

In the given figure, a straight line saving curve is plotted showing saving function at different levels of income. It shows negative saving at zero level of income and zero saving level at OR level of income. At point R, consumption expenditure = income, whereas to the left of R, consumption expenditure is less than income.

At zero level of income, consumption expenditure is shown as OC which is equal to dis?saving of OS, OC = OS. Thus C is the starting point of consumption curve. At OR level of income, saving is zero, it shows that consumption expenditure must be equal to income of OR. This enables to plot OD as consumption expenditure equal to OR, which in turn gives a point B on 45 degree line showing OD equal to OR. Thus B becomes the point on proposed consumption curve.

B is the point on consumption curve at which total consumption expenditure (C) is equal to income (Y). At point B, APC (C/Y) = 1.