Question

Given Consumption curve, derive saving curve and state the steps taken in the process of derivation. 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 $A$, 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 Son the negative axis in the lower panel.
(ii) At point $B(Y=\overline{C})$. 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.