Income Determination

2. Grade XII
Economics
Income Determination

3. Learning Objectives
 To calculate MPS and APS
 To calculate MPC and APC
 To understand AD-AS Approach
 To understand S-I Approach

4. Complete the following table.
Y 400 600 800 1200
C 240 420 595 665
MPC
MPS

5. Solution
Y 400 600 800 1200
C 240 420 595 665
MPC ------ .9 .87 .17
MPS ------ .1 .13 .83

6. Numerical
 Given that national income is Rs.80 crore and
consumption expenditure is Rs.64 crore, find
out the average propensity to save. When
income rises to Rs. 100 crores and
consumption expenditure to Rs.78 crores,
what will be the average propensity to
consume and the marginal propensity to
consume?

7. Solution
APS= 16/80=.2
When income rises
APC= 78/100=.78
MPC=14/20=.7

8. Previous question
 Given below is the consumption function of
an economy.
 C= 100 + 0.6Y
 With the help of a numerical example, show
that in this economy, as income increases,
APC will decrease.

9. Solution
Income Consumption APC
100 100+.6× 100=160 1.6
200 100+.6× 200=220 1.1
300 100+.6× 300=280 0.93
400 100+.6× 400=340 0.85
500 100+.6× 500=400 0.80
As income increases from 100 to 500, APC
decreases from 1.6 to 0.80 . This shows that APC
decreases with increases in income. This means
there will be more savings in the economy.

10. At which point in the diagram is APC =1?

11. True or False?
 APS can be negative.
 Total consumption in the economy can never
be greater than national income.
 When APS is negative, MPS also will be
negative.
 APS can never be greater than 1.
 Both MPS and APS can be equal to 1.
 The sum of APC and MPC is always equal to
1.
 MPS can never be negative.

12. Income Determination
 An economy is in equilibrium when
aggregate demand for goods and services is
equal to aggregate supply during a period of
time.
 AD=AS
 C+I=C+S
 S=I
 According to the Keynesian theory, there are
two approaches for determining the
equilibrium level of income and employment
in the economy.

13. Investment function
 Investment refers to the expenditure
incurred on creation of new capital
assets.
 It includes the expenditure incurred on
assets like machinery, building,
equipment, rawmaterial,etc.

14.  The Investment expenditure is classified
under two heads-
 Induced Investment
 Autonomous investment

15. Induced Investment
 It is directly influenced by the income
level. It is made when marginal
efficiency of investment is more than the
rate of interest.

16. Autonomous investment
 It refers to the investment which is not
affected by changes in the level of
income and is not induced solely by
profit motive.

17. Ex-Ante Saving & Investment
 Ex-Ante Saving-It refers to the amount
which savers plan to save at different
levels of income in an economy.
 Ex-Ante Investment-It refers to the
amount which investors plan to invest at
different levels of income in an economy.

18. Ex-post Saving & Ex-post Investment
 Ex-post Saving-It refers to the actual
saving in an economy during a year.
 Ex-post Investment-It refers to the actual
investment in an economy during a year.

19. Full Employment
 It refers to a situation in which all
those people, who are willing and
able to work at the existing wage
rate, get work without any undue
difficulty.

20. Involuntary Unmployment
 It refers to a situation in which all those
people, who are willing and able to work
at the existing wage rate, do not get
work.

21. Full Employment Equilibrium
 It refers to a situation when
aggregate demand is equal to the
aggregate supply at full employment
level.

22. Underemployment Equilibrium
 It refers to a situation when
aggregate demand is equal to the
aggregate supply at a level where the
resources are not fully employed.

23. Over Full Employment Equilibrium
 It refers to a situation when AD is
Equal to AS beyond the full
employment level.

24. Review
 What is the formula for MPC, MPS, APS and
APC?
 What is the equation for consumption
function?
 What is the equation for saving function?

25. Recapitulation
 AD = C + I; AS = C + S; C = ̅C+ MPC × Y
 (i) APC is more than 1: as long as consumption is
more than national income before the break-
even point, APC > 1.
 (ii) APC = 1, at the break-even point,
consumption is equal to national income.
 (iii) APC is less than 1beyond the break-even
point. Consumption is less than national income.
 (iv) APC falls with increase in income.
 (v) APC can never be zero: because even at zero
level of national income, there is autonomous
consumption.

26. Recapitulation
 (1) Value of MPC varies between O and 1: If
the entire additional income is consumed,
then ΔC = ΔY, making MPC = 1. However, if
entire additional income is saved, than ΔC =
0, making MPC = 0
 (2) MPC is the slope of consumption curve
and remain constant throughout in the short
run.
 (3) MPC falls with successive increase in
income:

27. Recapitulation
 MPS varies between 0 and 1
 (i) MPS = 1 if the entire additional income is
saved. In such a case, ΔS = ΔY, then MPS = 1
 (ii) MPS = 0 If the entire additional income is
consumed. In such a case, ΔS = 0, then MPS
= 0
 (iii) Mps is the slope of saving curve.
 (iv) MPS remains constant throughout in
short run.

28. Recapitulation
 (1) APS can never be 1 or more than 1 :As
saving can never be equal to or more than
income.
 (2) APS can be zero: At break even point C =
Y, hence S = 0
 (3) APS can be negative: At income levels
which are lower than the break-even point,
APS can be negative when consumption
exceeds income.
 (4) APS rises with increase in income.