Question

Explain the steps taken in derivation of the Consumption Curve from the Saving Curve. Use diagram.

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.