Question

Given a consumption curve, outline the steps required to be taken in deriving a saving curve from it. Use diagram.

Answer 1

In the diagram $\overline{C}+bY$ is the consumption curve.

The ${45}^o$ line is the aggregate supply curve.

At point $E$, consumption $=$ income i.e $(Y=C)$

$\overline{C}$ represents the autonomous consumption i.e consumption at zero level of income.

Steps for derivation of supply curve from consumption curve as follows.

(i) Corresponding to $\overline{C}$ in the consumption function we have $-\overline{C}$ in the saving function. That is. there are negative savings equal to autonomous consumption at $Y=0$. This is represented by $S$ on the negative axis in the lower panel.

(ii) At point $E(Y=\overline{C})$. This implies that all the income is spent on consumption expenditure. Thus, savings equal to zero. This is shown as $S=0$ in lower panel. This point is also known as the Break-even point.

(iii) Beyond the break-even point, by connecting points $S$ and $Y$ we derive the straight upward sloping saving curve.

(iv) $SS$ is the required saving curve.