Ad, As, And Related Concepts

Front 1

Aggregate demand

Back 1

Sum total of the expenditure that people plan to incur on purchase of goods and services produced in the economy corresponding to their different levels of income during one accounting year

Front 2

Components of AD

Back 2

AD = C + I + G + (X - M)

Front 3

Investment

Back 3

1) Induced investment - refers to investment made by the private sector with a motive of earning profits. It increases with increase in level of income.

2) Autonomous investment - refers to the investment made by the govt with an objective of social welfare. It remains constant irrespective of the level of income.

Front 4

Aggregate supply

Back 4

It refers to the flow of goods and services as planned by the producers during one accounting year, it is identical to income (Y). AS = Y. IAS curve is a 45° line

Front 5

Propensity to consume

Back 5

It refers to the proportion of income used as consumption expenditure, it's the ratio between C and Y

Front 6

Consumption function

Back 6

1) There is always some minimum level of consumption even when income is 0, this is called Autonomous Consumption. This leads to negative saving (-S)

2) Consumption is positively related to income.

3) Rate at which C rises is < Rate at which Y rises.

4) The point where C = Y is called the Break-even Point.

5) C = Ç + bY ; Ç = Autonomous Consumption, b = MPC, Y = income

Front 7

APC MPC

Back 7

1) MPC is the slope of the C function.

2) APC = C/Y

3) MPC = Delta C/Delta Y

4) Linear consumption function is a function where MPC is constant.

5) APC is the ratio of total consumption and total income

6) MPC is the ratio of between additional consumption and additional income

Front 8

Propensity to save

Back 8

It refers to the proportion of income which is kept as saving, it is measured as the ratio between S and Y.

Front 9

Saving function

Back 9

1) S = Y - C.

2) S is positively related to Y.

3) S will always remain lower than Y.

4) The point where S = 0 is called the Break-even Point.

5) S = -Ç + (1-b)Y ; Ç = autonomous consumption, 1-b = MPS, Y = income.

Front 10

APS MPS

Back 10

1) APS = S/Y

2) MPS = Delta S/Delta Y

3) Slope of S function is MPS

4) APS is the ratio between total saving and total income

5) MPS is the ratio between additional saving and additional income

6) Linear saving function is one where MPS is constant.

Front 11

Relationship between APC APS, MPC MPS and it's range

Back 11

1) APC + APS = 1

2) MPC + MPS = 1

3) When C > Y

APC > 1

When C = Y

APC = 1

When C < Y

APC < 1

4) APC can never be 0

5) APC falls with increase in income

6) MPC - [0, 1]

7) MPC falls as income increases

8) APS can never be >=1

9) APS can be 0 at Break-even Point

10) APS rises with increase in income

12) APS can be negative

11) MPS is always positive

Front 12

Table to use for schedule

Back 12

Front 13

Consumption and Saving function graph

Back 13