Question

Draw on a diagram, a straight line savings curve for an economy. From it derive the consumption curve, explaining the method of derivation. Show a point on the consumption curve at which average propensity to consume is equal to 1.

Answer 1

In the given diagram, SS' Is the saving curve which shows negative savings equal to OS at zero level of income and zero saving at OA level of income.
At zero level of income, consumption expenditure is equal to OC which is equal to negative saving of OS at that level of income. So, C is the starting point of consumption curve.
Savings are zero at OA level of income as the whole of Income is spent. So, at OA level of income, consumption expenditure must be equal to OD=OA. This gives a point B on the consumption curve.
By Joining C and B and extending it further, we get consumption curve. At point B on the consumption curve, total consumption expenditure (C) is equal to total income (Y). So, C/Y=1. Hence, at point B on consumption curve, APC=1.