Question

Write Short notes on:

1) Effective Demand
2) Saving Function
3) Break-even Point
4) Average Propensity to Consume
5) Marginal Propensity to Consume

Answer 1

1) Effective demand is defined as the total expenditure incurred by all people in an economy on the various goods and services produced in an economy over a given period of time. It is determined by the intersection of aggregate demand and aggregate supply.

2) The consumer does not spend the entire increase in his income on consumption. Rather, a portion (generally fixed) of the increase in income is kept as savings. Thus, as the income increases, savings also increase. This relationship between the savings and income is depicted in a functional form by the savings function. The savings function can be expressed as:
S = f(y)


3) Breakeven point is a point where consumption exactly equals income and correspondingly, savings are zero. Graphically, it is represented by the intersection of the income line or the 45 degrees line and the consumption curve. Algebraically, breakeven is achieved when Y = C


4) Average Propensity to Consume (APC) expresses the propensity to consume in aggregate terms. It shows the ratio of consumption expenditure to the level of income. Algebraically,
$APC=\frac{C}{Y}$

5) Marginal propensity to consume expresses the propensity to consume in proportionate terms. It refers to the ratio of change in the consumption expenditure to the change in the disposable income. Algebraically, $\mathrm{MPC}=\frac{∆C}{∆Y}$where,