Question

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

Answer 1

Steps taken for derivation of consumption curve are:

(i) At zero level of income, the savings are O\overline{S} which is the amount of autonomous consumption at Y= 0. So, -O\overline{S} = O\overline{C}. Hence, the consumption will start from the point \overline{C}.

(ii) We draw a 45° line passing through the origin which shows that C = Y. This is the income line.

(iii) Now, we draw a vertical line from the point E, where saving is zero. At zero level of saving, C = Y. So, B is the break-even point.

(iv) The consumption curve is derived meeting C and B and extending it forward.