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2. Aggregate Demand
⦿It refers to the total value of final
goods and services which all the
sectors of an economy are planning
to buy at a given level of income
during a period of year accounting.

3. Components of aggregate
demand
⦿ Private Consumption Expenditure-It refers to the
total expenditure incurred by households on purchase
of goods and services during an accounting year.
⦿ Investment Expenditure-It refers to the total
expenditure incurred by all private firms on capital
goods.
⦿ Government Expenditure-It refers to the total
expenditure incurred by government on consumer
goods and capital goods to satisfy the common needs
of the economy.
⦿ Net Exports-The difference between exports and
imports is termed as net exports.

4. Components of aggregate
demand

5. Aggregate Supply
⦿Aggregate Supply refers to money value of
final goods and services that all the
producers are willing to supply in an
economy in a given time period.

6. Aggregate
Supply=National Income
⦿The sum Total of these factor incomes(i.e.
rent+wages+interest+profit) at domestic
and National level is termed as National
Income. So, we can say that aggregate
supply(AS) and national income(Y), are
one and the same thing.

7. Components of Aggregate
Supply(AS) or National Income(Y)
⦿ National Income(Y)=Consumption(C)+Saving(S)
OR
Y=AS+C+S

8. Consumption Function
(Propensity to Consume)
⦿Consumption function refersto functional
relationship between consumption and
national income.
C=F(Y)

9. Types of Propensities to
consume
⦿ Average Propensity to Consume(APC)
⦿Marginal Propensity to
Consume(MPC)

10. Average Propensity to Consume
⦿ It refers to the ratio of consumption
expenditure to the corresponding level
of income.
APC = C/Y
Where , APC=Average propensity to
consume; C=Consumption; Y=Income

11. Marginal Propensity to
consume
⦿It refers to the ratio of change in
consumption expenditure to change in
total income
⦿ MPC= C
Y

12. Difference Between APC and MPC
MPC
⦿ It is the ratio of
consumption expenditure
(C) to the corresponding
level of income(Y) at a
point of time.
⦿ APC can bemore than one
as long as consumption is
more than national income,
i.e. till the break even
point.
⦿ When Income increases ,
APC falls but a rate less
than that of MPC.
A⦿PCAPC=C/Y
⦿ It is the ratio of change in
consumption expenditure
to change in income over a
period of time.
⦿ MPC cannot be more than
one as change in
consumption cannot be
more than change in
income.
⦿ When Income increases ,
MPC also falls but a rate
more than that of APC.
⦿ MPC= C
Y

13. Saving Function
(Propensity to save)
⦿ Saving functions refers to the functional
relationship between saving and national income.
S=f(Y)
Where, S=Saving; Y=National Income; f=Functional
relationship

14. Average Propensity to
Save
⦿Average propensity to save refersto the
ratio of saving to the corresponding level
of income.
APS=Saving/Income

15. Marginal Propensity to
consume
⦿Marginal propensity to save refers to the
ratio of change in saving to change in
total income.
MPS=Change in Saving
Change in Income

16. 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,rawmateri
al,etc.

17. ⦿The Investment expenditure is classified
under two heads-
 Induced Investment
 Autonomous investment

18. 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.

19. 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.

20. E x-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.

21. 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.

22. 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.

23. Involuntary Employment
⦿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.

24. The components of aggregate
demand are :
⦿ Demand for goods and services for
private consumption also called
private final
⦿consumption expenditure.
⦿ Demand for private investment
⦿ Demand for goods and services by
the government
⦿ Net exports.