Aggregate Demand and Its Components - Consumption

• Shows how consumption changes as income changes.
• At zero income, consumption does not become zero — households still spend (autonomous consumption).
• The consumption curve starts above the origin and slopes upward.

\[C=\bar{C}+cY\]

• Consumption that takes place even when income is zero.
• Represented by the Y-intercept of the consumption curve.
• It is independent of income.

• Consumption that depends on income.
• Represented by cY in the consumption function.
• When income rises by ₹1, induced consumption rises by MPC (c).

• Change in consumption due to a unit change in income.
• Value always lies between 0 and 1 (inclusive).

\[MPC=c=\frac{\Delta C}{\Delta Y}\]

• Change in saving due to a unit change in income.
• MPC and MPS together always equal 1.

\[MPS=s=\frac{\Delta S}{\Delta Y}\]

• Ratio of total consumption to total income at a given level of income.

\[APC=\frac{C}{Y}\]

• Ratio of total saving to total income at a given level of income.

\[APS=\frac{S}{Y}\]

• Saving is the part of income that is not consumed.

Since,

\[S = Y − C\]

then,

\[s = 1 − c\]

\[MPC + MPS = 1\]

or

\[s = 1 − c\]

• Represents all points where income = consumption (\[C=Y\]).
• At this point, savings = 0.
• If the consumption curve is below the 45° line → savings are positive.
• If the consumption curve is above the 45° line → dissaving (spending more than income).

• Consumption function: C = 100 + 0.8Y
• Autonomous consumption = 100 (consumption at zero income).
• MPC = 0.8 (out of every ₹100 rise in income, ₹80 is consumed).
• Conclusion:
• If income rises by ₹100, consumption rises by ₹80 and savings rise by ₹20.

• The consumption function \[C=\bar{C}+cY\] shows that consumption consists of autonomous consumption and induced consumption.
• Autonomous consumption \[\overline{C}\] is the minimum consumption even when income is zero.
• Induced consumption (\[cY\]) depends on income.
• MPC measures how much of an additional income is spent; its value always lies between 0 and 1 (inclusive).
• MPS measures how much of an additional income is saved; MPC + MPS = 1.
• \[APC=\frac{C}{Y}\] and APS = \[APS=\frac{S}{Y}\] measure average spending and saving relative to income.
• The 45° line is the reference line where income equals consumption and saving is zero.