Question

Draw a diagram of a straight-line consumption curve for an economy. Derived the saving curve from it. Explain the method of its derivation.

Answer 1

The saving curve (S) can be derived from the consumption curve (C). In the diagram, the upper panel shows the consumption function, while the lower panel shows the corresponding saving function. The 45° line (Y = C + S) acts as a reference, showing that income is the sum of consumption and saving at all levels.

The vertical gap between the 45° line and the C curve represents savings—this gap increases with income, indicating that savings rise as income rises. When the C curve lies above the 45° line, saving is negative (dissaving). When it lies below, saving is positive. Thus, the saving curve slopes upward as income increases.

At an income level below OY₀ (e.g., OY₁), consumption exceeds income, so saving is negative (dissaving). When income is zero, consumption equals autonomous consumption (a), making saving –a. This is shown below the X-axis in the saving curve.

At OY₀, the consumption curve intersects the 45° line, meaning consumption = income and saving = 0.

Beyond OY₀ (e.g., OY₂), income exceeds consumption, so saving is positive, shown above the X-axis. The vertical distance between the saving curve and the X-axis matches the gap between the consumption curve and the 45° line.

It also follows that since additional income is used either in increasing consumption or in increasing saving, i.e.,

ΔC + ΔS = ΔY

∴ `(DeltaC)/(DeltaY) + (DeltaS)/(DeltaY) = (DeltaY)/(Delta)Y`   (Dividing both the sides by Δy)

or MPC + MPS = 1

Thus, the sum of MPC and MPS is always equal to 1 at all levels of income. Therefore,

MPC = 1 − MPS

and MPS = 1 − MPC