Question

Outline the steps taken in deriving Consumption Curve from the Saving Curve. Use diagram. 

Answer 1

In the lower part of the diagram `barc+s_y` is the saving curve.  OS equal to `barc`represents the saving at zero level of income.

Steps for the derivation of consumption curve from the saving curve are as follows.

1. `barc`Corresponding to  in the saving function, we have `barc` in the consumption function. That is, it represents the autonomous consumption or the consumption at zero level of income. The autonomous consumption is financed by drawing down savings.
2. At point B, saving equals zero. This suggests that whole of income is spent on consumption. That is, Y= C.  This point is also known as the break-even point. This is shown by point A in the upper panel denoting Y=C.
3. By joining the points C and A we derive the straight upward sloping consumption curve.
4. CC is the required consumption curve.