Income and Employment PDF

## Unit-3 Determination of Income and Employment **SUBHASH DEY (Shree Radhey Publications)** ### 3.1 Aggregate Demand and its Components #### Consumption Function: Propensity to Consume (Average and Marginal) **Ex-ante and Ex-post Measures** In the *Unit-1* on *National Income and Related Aggre...

## Unit-3 Determination of Income and Employment **SUBHASH DEY (Shree Radhey Publications)** ### 3.1 Aggregate Demand and its Components #### Consumption Function: Propensity to Consume (Average and Marginal) **Ex-ante and Ex-post Measures** In the *Unit-1* on *National Income and Related Aggregates*, we have come across terms like consumption, investment, or the total output of final goods and services in an economy (*GDP*). These terms have dual connotations. In *Unit 1* they were used in the accounting sense denoting actual values of these items as measured by the activities within the economy in a certain year. We call these actual or accounting values *ex-post measures* of these items. **Meaning** The actual (or realised) values of the variables - consumption, investment or output of final goods -are called their *ex-post measures*. **Examples:** - Ex-post consumption: The actual consumption expenditure incurred in a given year. - Ex-post investment: The actual amount of investment made by the producers in the economy during a period. - Ex-post savings: The actual amount of savings made in the economy during a period. These terms, however, can be used with a different connotation. Consumption may denote not what people have actually consumed in a given year, but what they had planned to consume during the same period. Similarly, investment can mean the amount a producer plans to add to his inventory. It may be different from what he ends up doing. **Example** Suppose the producer plans to add ₹100 worth goods to his stock by the end of the year. His planned investment is, therefore, ₹100 in that year. However, due to an unforeseen upsurge of demand for his goods in the market the volume of his sales exceeds what he had planned to sell and, to meet this extra demand, he has to sell goods worth ₹30 from his stock. Therefore, at the end of the year, his inventory goes up by (100-30) = ₹70 only. Thus, his planned investment is ₹100 whereas his actual, or *ex-post*, investment is ₹70 only. **Meaning** The planned values of the variables are called - consumption, investment or output of final goods - their *ex-ante measures*. **Examples:** - Ex-ante consumption: The consumption expenditure planned to be incurred during a period. - Ex-ante investment: The value of planned investment in a given year. - Ex-ante savings: The value of savings which all the households plan to make at different levels of income during a period. **Conclusion** The planned values of the variables are called their *ex-ante measures*; whereas, the actual (or accounting) values of the variables are called their *ex-post measures*. *Ex-ante* depicts what has been planned, and *ex-post* depicts what has actually happened. **Must know!** In order to understand the determination of income in the economy, we need to know the *ex-ante* (or planned) values of different components of *aggregate demand* - *ex-ante consumption expenditure* and *ex-ante investment expenditure*. Since the determination of income is to be studied in the context of a closed economy without government, the two sectors taken are households and firms. ### 3.4 Key Terms **Ex-ante:** The planned value of a variable as opposed to its actual value. **Ex-post:** The actual or realised value of a variable as opposed to its planned value. **Aggregate demand:** The total demand for final goods and services in an economy. It means the aggregate expenditure on final goods and services in an economy. **Consumption:** The most important determinant of consumption expenditure (or consumption demand) is household income. **Meaning** Consumption expenditure refers to that portion of income which is spent on purchasing goods and services by the consumers (or households) in an economy during an accounting period. *There is a direct (positive) relation between income and consumption expenditure, that is, the higher the income, the higher the consumption expenditure. In other words, when income increases, consumption also increases. However, the consumption can never exceed the increase in income.* *Services for private consumption is also called private final consumption expenditure, which is a part of aggregate expenditure. It must be kept in mind that the consumption expenditure we are discussing is *ex-ante*, i.e. planned consumption expenditure.* #### Consumption Function **Meaning** A consumption function refers to the functional relationship between *Consumption (C)* and *Income (Y)*. - In Keynesian economics, the consumption function assumes that consumption changes at a constant rate as income changes. - *There is some minimum level of consumption even at a zero level of income, called *autonomous consumption*. Autonomous consumption is that consumption expenditure which must be undertaken even at a zero level of income. It signifies the minimum level of consumption which is essential for survival.* **Top Tip** *Even if income is zero, some consumption still takes place, representing subsistence consumption level of an economy. Since this level of consumption is independent of income, it is called autonomous consumption.* We can describe consumption function as: **C = C + bY** The above equation is called the consumption function. Here, - **C** = Consumption expenditure by households - **Y** = Level of income in the economy (i.e., national income) - **C** = Autonomous consumption (i.e., subsistence consumption level of an economy at zero level of income) - **b** = Marginal Propensity to Consume (MPC) #### Key Terms **Autonomous Consumption:** The minimum level of consumption for survival even at a zero level of income. **Marginal Propensity to Consume (MPC):** The ratio of additional consumption to additional income. It refers to the rate of change in consumption as the incom changes. MPC is denoted by *b* and is equal to *ΔC/ΔΥ*. #### Components of the Consumption Function The consumption function *C = C + bY* consists of two components - Autonomous Consumption (C) and Induced Consumption (bY). - **Autonomous consumption** is denoted by *C* and shows the consumption which is independent of income. If consumption takes place even when income is zero, it is because of autonomous consumption. - **Induced consumption** is denoted by *bY* and shows the direct relation between consumption and income. In other words, induced consumption shows the dependence of consumption on income. With a certain increase in income, induced consumption also increases. For example, when income rises by ₹1, induced consumption rises by MPC, i.e. *b* or the marginal propensity to consume. #### Competency Based Question Imagine a country Imagenia, which has a consumption function described by: **C = 100 crore + 0.8Y** **What does the consumption function of Imagenia indicate?** - It indicates that even when Imagenia does not have any income, its citizens still consume ₹100 crore worth of goods and services. Imagenia's autonomous consumption is ₹100 crore. - Imagenia's induced consumption is 0.8Y, where marginal propensity to consume (MPC) is 0.8. This means that when national income rises in Imagenia, total consumption increases by 80% of the rise in national income. For example, if national income goes up by ₹1000 crore, total consumption in the economy will go up by 0.8 × ₹1000 crore, i.e by ₹800 crore. #### Numerical Given the consumption function of an economy: **C = 100 + 0.75Y** The national income is ₹900 crore. **Calculate the values of the two components of the consumption function.** Solution: Consumption function C = 100 crore + 0.75Y, where Y = 900 Comparing with the consumption function C = C + bY, we have C = 100 and b (i.e., MPC) = 0.75 Thus, values of the two components of the consumption function are: - Autonomous Consumption (C) = 100 crore - Induced consumption (bY) = 0.75 x 900 = 675 crore #### Numerical What is the level of consumer spending in the country when the national income is ₹1,200 crore, given that the subsistence level is ₹100 crore and the slope of the consumption function is constant at all levels of income at a value of 0.75? Solution: Given: National Income (Y) = 1,200 Subsistence level of consumption in the economy, i.e. autonomous consumption (C) = 100 Slope of the consumption function, b (i.e., MPC) = 0.75 Therefore, the consumption function is: C = C + bY C= 100+ 0.75Y Substituting Y = 1,200, we get C = 100+ 0.75 x 1,200 = 100 + 900 = 1,000 Thus, the level of consumer spending in the country (C) = ₹1,000 crore #### Numerical Suppose in a hypothetical economy, the income rises by 20% to ₹6,000 crore. As a result, the consumption expenditure rises by 15% to ₹4,600 crore. What will be the value of *Marginal propensity to consume* in the economy? What does it imply? Solution: Suppose original level of income in the economy: Y = x. Since the income rises by 20%, new level of income = x + 0.2x = 1.2x Therefore, 1.2x = 6,000 ⇒ x = 5,000 Thus, increase in income (AY) = 6,000 – 5,000 = 1,000 crore Now, original level of consumption expenditure = ₹4,000 crore. Since the consumption rises by 15%, increase in consumption expenditure (AC) = 15% of 4,000 = ₹600 crore Value of *Marginal Propensity to Consume (MPC)* = AC/ΔΥ = 600/1,000 = 0.6 MPC of 0.6 implies that in this economy as income goes up, people spend 60% of rise in income on consumption. #### What values can MPC take? Generally, MPC ranges from 0 to 1 (inclusive of both values). Thus, 0 ≤ MPC ≤ 1. **Top Tip** The maximum value which MPC can take is 1. MPC can never be greater than 1. This is because when income changes, change in consumption (AC) can never exceed the change in income (ΔΥ). When consumers use the entire change in income on consumption, MPC = 1. On the other hand, consumers may choose not to change consumption even when income has changed. In this case MPC = 0. This means that as income increases, the consumers do not increase consumption at all (MPC = 0). Consumers may use part of the change in income for changing consumption (0 < MPC <1). **Must know!** The realistic situation is when in an economy the consumers use a part of the change in income for changing consumption. Thus, in reality MPC lies between 0 and 1, i.e. 0 < MPC < 1. In Keynesian analysis, MPC is assumed to be constant. Therefore, the consumption function is a straight line (linear) consumption function. However, in reality, as income increases MPC has a tendency to decline. As the income increases, a rational consumer tends to save more. Hence, at higher levels of income people generally have lower MPC. #### Average Propensity to Consume (APC) From the consumption function, we can find out the value of the consumption-income ratio at every level of income. At any particular level of income, the ratio of the total consumption to total income is called the *Average Propensity to Consume (APC)* **APC = C/Y** The APC gives the average consumption-income relationship at different levels of income. **Meaning** Average propensity to consume (APC) is the consumption per unit of income, i.e. C/Y **Top Tip** APC can never be zero because consumption expenditure (C) in the economy cannot be zero. Even at zero income (when Y = 0), there has to be a minimum or subsistence level of consumption expenditure, called autonomous consumption. #### Numerical Given that National Income is ₹80 crore and consumption expenditure ₹64 crore, find out average propensity to consume. When income rises by 25%, consumption expenditure rises by ₹14 crore, what will be the new value of APC and MPC? (3) Solution: National income (Y) = 80 and Consumption expenditure (C) = 64 Therefore, Average Propensity to Consume (APC) = C/Y = 64/80 = 0.8 Income rises by 25%. Therefore, increase in income (AY) = 25% of 80 = 20. Thus, the new level of income = 80 + 20 = 100 Consumption expenditure rises by ₹14 crore (i.e., AC = 14). Thus, the new level of consumption = 64 + 14 = 78 Therefore, the new value of APC = 78/100 = 0.78 and the new value of MPC = AC/ΔΥ = 14/20 = 0.7 | Income (Y) | ΔΥ | Consumption (C) | AC | APC (C/Y) | MPC (AC/AY) | |---|---|---|---|---|---| | 80 | 20 | 64 | 14 | 0.8 | | | 100 | | 78 | | 0.78 | 0.7 | #### Numerical In an economy, the total consumption expenditure (C) of households is 1,500 crore, and the total disposable income (Y) is ₹2,000 crore. Calculate the average propensity to consume. However, suppose there is a government tax policy change that reduces the disposable income by 10% of the original value. However, this change does not affect the consumption expenditure. Calculate the new average propensity to consume after the policy change. Solution: Total consumption expenditure (C) = 1,500 and Total disposable income (Y) = 2,000 Therefore, Average Propensity to Consume (APC) = C/Y = 1,500/2,000 = 0.75 Disposable income (after the tax policy change) = 2,000 - 10% of 2,000 = 1,800 crore Therefore, the average propensity to consume after the tax policy change, Average Propensity to Consume (APC) = 1,500/1,800 = 0.8333 Average Propensity to Consume is approximately 83.33% after the tax policy change. #### Consumption Schedule Imagine a country Imagenia, which has a consumption function described by: C = 100 + 0.8Y This indicates that even when Imagenia does not have any income, its citizens still consume ₹100 crore worth of goods. Thus Imagenia's autonomous consumption is ₹100 crore. Its marginal propensity to consume is 0.8. This means that if income goes up by 100 in Imagenia, consumption will increase by ₹80. In other words, people spend 80% of rise in income on consumption | Income (Y) | ΔΥ | Consumption (C) | AC | MPC (AC/ΔΥ) | APC (C/Y) | |---|---|---|---|---|---| | 0 | | 100 | | | | | 100 | 100 | 180 | 80 | 0.8 | 1.80 | | 200 | 100 | 260 | 80 | 0.8 | 1.30 | | 300 | 100 | 340 | 80 | 0.8 | 1.13 | | 400 | 100 | 420 | 80 | 0.8 | 1.05 | | 500 | 100 | 500 | 80 | 0.8 | 1 | | 600 | 100 | 580 | 80 | 0.8 | 0.97 | | 700 | 100 | 660 | 80 | 0.8 | 0.94 | | 800 | 100 | 740 | 80 | 0.8 | 0.93 | | 900 | 100 | 820 | 80 | 0.8 | 0.91 | | 1000 | 100 | 900 | 80 | 0.8 | 0.90 | Column (3) shows the consumption expenditure at various levels of income. The values in column (3) are obtained from the consumption function equation C = 100 + 0.8Y. For example, When income (Y) = ₹100 crore, consumption (C) = 100 + 0.8 × 100 = 100 + 80 = ₹180 crore. When Y = ₹200 crore, C = 100 + 0.8 x 200 = 100 + 160 = 260 crore. Column (5) shows MPC, which is equal to AC/AY. For example, as income increases from ₹100 crore to ₹200 crore (ΔΥ = ₹100 crore), the consumption increases from ₹180 crore to ₹260 crore (AC = ₹80 crore) and thus MPC = 80/100 = 0.8. #### Consumption Curve Figure 3.1 shows the graph of the consumption function C = 100+ 0.8Y. [Image Description: A graph which plots consumption on the y-axis and income on the x-axis. The Consumption line (C) starts at 100 crore and increases at a slope of 0.8. A dotted 45° line represents the point where consumption is equal to income and is where savings (S) is 0. The consumption line crosses the 45° line at 500, showing that at 500, consumption = income and there is no saving. The consumption curve lies below the 45° line after that point. The consumption line is labeled C = 820 at the point where it crosses the right side of the graph. Above the 45° line, the consumption curve lies above the 45 ° line. The graph is labeled as Fig. 3.1 Consumption Curve] **DID YOU KNOW?** *The consumption curve does not start from origin because of the assumption that there is some minimum level of consumption even at a zero level of income, which is essential for survival. This is called autonomous consumption. Thus, the consumption curve starts from some positive level on Y-axis at a zero level of income.* #### Competency Based Question "Consumption function curve of an involuntary unemployed worker starts from some positive level on Y-axis, because even when his income is zero, consumption expenditure is not equal to zero." Justify the given statement. Consumption function curve of an unemployed person starts from some positive level on Y-axis, because even when his income is zero, consumption expenditure is not equal to zero. If consumption takes place even when income is zero, it is because of autonomous consumption, which shows the consumption which is independent of income. Autonomous Consumption signifies the minimum level of consumption which is essential for survival. #### Significance of the 45° line from the origin The 45º line from the origin has the feature that every point on it has the same horizontal and vertical coordinates. Since income is shown on the horizontal axis (i.e., X-axis) and consumption on the vertical axis (i.e., Y-axis), at every point on the 45º line, consumption is equal to income. Thus, the 45º line tells us whether consumption is equal to, greater than, or less than income. The consumption curve crosses the 45º line at point B. This point is known as the *Break-Even Point (B.E.P.)*. **Meaning** Break-even point is the point at which consumption is equal to income (C = Y). In Figure 3.1, point B is the B.E.P. because Consumption (C) = income (Y) = 500 crore. **At Break-even Point, Average Propensity to Consume (APC) = 1** Explanation: Break-even point is the point at which consumption is equal to income (C = Y). Average Propensity to Consume (APC) = C/Y. Since C = Y, APC = C/Y = 1 **DID YOU KNOW?** *The consumption curve lies above the 45º line, consumption is greater than total income, due to the existence of autonomous consumption. For example, at an income level (Y) = ₹200 crore, the consumption (C) is ₹260 crore. Thus, at any lower levels of income before break-even point, total consumption expenditure is ₹60 crore greater than total income. The households must find funds (₹260 crore - ₹200 crore) = ₹60 crore to meet the extra consumption expenditure. The shortage in income will make them sell the assets acquired in the past, or to resort to borrowing so they can obtain a loan is referred to as the process of dissavings. Since C > Y, APC > 1. Thus, before the break-even point APC > 1.* *Dissavings occur when Consumption (C) is greater than Income (Y). This signifies that spending for necessities which are necessary for survival is financed by past savings and borrowings.* #### Competency Based Question "Value of which of the following can be greater than one: Marginal Propensity to Consume (MPC) or Average Propensity to Consume (APC)?" **It is the Average Propensity to Consume (APC) which can be greater than one, at any lower levels of income before the break-even point due to the existence of autonomous consumption.** *When the consumption curve lies below the 45º line, consumption is less than income (C <Y). For example, at an income level (Y) = ₹900 crore, consumption (C) is ₹820 crore. Thus, after the break-even point, total consumption expenditure is less than total income. This is because as income increases, the proportion of income saved increases and hence the proportion of income consumed decreases. Since C <Y, APC < 1. Thus, after the break-even point APC < 1.* *APC is continuously declining as income increases. This means that as income increases, the proportion of income consumed decreases. Explanation: At a lower level of income, a consumer spends a larger proportion of his/her income on consumption expenditure (basic survival requirements). As the income increases, owing to the psychological behavior of a consumer (rational), people tend to save more for future uncertainty and thus consume a lesser proportion of their incomes.* #### Savings Function: Propensity to Save (Average and Marginal) **Savings Function** **Meaning** Savings function refers to the functional relationship between *Savings (S)* and *Income (Y)* **Top Tip** *There is a direct (positive) relation between income and savings. The higher the income, the higher is the level of savings. Vice-versa.* **DID YOU KNOW?** *Consumption and Savings complement each other. Consumption and savings are the functions of income (i.e., Y = C + S). The major portion of income is spent on consumption of goods and services and the remainder is saved, i.e. savings and consumption are interdependent. This means that income is either consumed or saved.* #### Derivation of savings function from consumption function Savings are that part of income that are not consumed. **S=Y-C** This equation tells us that by definition, saving are equal to income minus consumption. Substituting the consumption function equation C = C + bY into the above equation, we can get the savings function equation. **S = Y - (C+bY)** **S = Y - C - bY** **S = -C + (1- b)Y** **S= -C + sY** Here, - **Y** = The level of income in the economy, i.e. national income - **S** = ex-ante (or planned savings) at that level of income - **C** = The amount of dissavings (negative savings) at zero level of income. **Did You Know?** *Since even at a zero level of income, there will be some minimum amount of consumption (i.e., autonomous consumption) for survival, therefore at a zero level of income, there will be dissavings. Dissavings signify that spending for basic needs which are necessary for survival is financed by past savings and borrowings.* **s = (1 - b)** is called **Marginal Propensity to Save (MPS)**. It is the slope of the savings function. It represents the change in savings due to a given change in income. **Meaning** Marginal propensity to save (MPS) is defined as the change in savings per unit change in income. **MPS = ΔS/ΔΥ** MPS is denoted by *s* and is equal to 1- b. **Numerical Example:** Given the consumption function C = 100 + 0.8Y, we can derive the corresponding savings function. S=Y-C Substituting the consumption function equation C = 100 + 0.8Y, we can get the savings function equation. S = Y - (100 + 0.8Y) ⇒S = Y-100 – 0.8Y ⇒S= -100 + 0.2Y Here, MPS = 0.2, which means that in the economy 20% of total additional income is put into additional savings by people; and dissaving at zero income = ₹100 crore (which is equal to autonomous consumption). **DID YOU KNOW?** *Given the savings function, we can derive the corresponding consumption function. Consumption and Savings functions complement each other. Both are the functions of income (i.e., Y = C + S). The two functions are closely related, since income always equals consumption plus savings (Y = C + S), therefore, the part of income which is not saved is consumption. **C=Y-S** Substituting the savings function equation S = -C + sY into the above equation, we can get the consumption function equation. C = Y - (-C+sY) ⇒ C=Y+C-SY⇒ C = C + (1-s)Y ⇒ C=C+bY **Example:** Given the savings function S = -100 + 0.2Y, we can derive the corresponding consumption function. C=Y-S Substituting the savings function S = -100 + 0.2Y into the above equation, we can get the consumption function. C = Y - (-100 + 0.2Y) ⇒ C = Y + 100 - 0.2Y ⇒ C = 100 + 0.8Y **MPC + MPS = 1** Explanation: MPS = AS/ΔΥ. Since S = Y - C, therefore MPS = Δ(Y-C)/ΔΥ = ΔΥ/ΔΥ - ΔC/ΔΥ = 1 - MPC Thus, MPS + MPC = 1 #### Relationship between MPC and MPS The sum of MPC and MPS is equal to 1. Explanation: MPS = AS/ΔΥ. Since S = Y - C, therefore MPS = Δ(Y-C)/ΔΥ = ΔΥ/ΔΥ - ΔC/ΔΥ = 1 - MPC Thus, MPS + MPC = 1 #### Derivation of Savings Curve from Consumption Curve Since income equals consumption plus savings, therefore, consumption and savings curves can be called complementary curves. Consumption curve can be derived from savings curve. Fig. 3.2 shows the derivation of consumption curve from savings curve. [Image Description: A graph which plots consumption and savings on the y-axis, and income on the x-axis. A dotted 45° line represents the point where consumption is equal to income and is where savings (S) is 0. The savings line (labeled S1S) starts at -100 crore and increases at a slope of 0.2. It crosses the x-axis at 500, the break-even point. The consumption curve (labeled C1C) starts at 100 crore and increases at a slope of 0.8. It crosses the x-axis at 500, the break-even point. The graph is labeled as Fig 3.2 Derivation of Savings Curve from Consumption Curve] **Did You Know?** *Since income equals consumption plus savings, therefore, consumption and savings curves can be called complementary curves. Consumption curve can be derived from savings curve.* Step 1: Draw a 45º line from origin. Step 2: On the savings curve S₁S, take OC₁ equal to OS₁, because in the economy the autonomous consumption is exactly equal to negative savings at zero income. Step 3: At point B₁, savings = 0. We draw a perpendicular from B₁ till it intersects the 45º line at B. B is the break-even point where consumption equals income. Step 4: Join C₁ and B and extend it by a straight line to get the consumption curve C₁C. #### Competency Based Question Answer the following questions on the basis of given figure: [Image Description: A graph which plots consumption and savings on the y-axis, and income on the x-axis. There is a dotted 45° line from origin to the right corner of the graph. The consumption line (labeled C) starts at 60 crore, increases at a slope of 0.8 and crosses the 45° line at 300. The saving line (labeled S) starts at -30, increases at a slope of 0.2 and intersects the 45° line at 300. The y axis of the graph is labeled as Consumption, Savings on the Y - axis and income on the X - axis. Point (B) is the point where consumption is equal to income on the 45° line. It is also the break-even point. The graph is labeled as Fig 3.3 Derivation of Consumption Curve from Savings Curve] - What does the shaded area OS₁B₁ indicate? - What is the significance of point B? - At which level of income, Average Propensity to Consume will be equal to one and why? - What is the significance of savings curve above the point B₁? - At which level of income Average Propensity to Save will be equal to zero and why? - What does 'OS₁' signify with respect to consumption curve? - The shaded area AOB represents the dis-savings. - Point B indicates the break-even level of income where Consumption (C) is equal to Income (Y) or Savings (S) are zero. It corresponds to the level of income = OB₁. - Average Propensity to Consume will be equal to one at point B, as here Average Propensity to Save is zero. - Point B indicates break-even level of income where Savings (S) are zero. Thus savings curve above the point B signifies the positive savings at levels of income greater than OB₁ level of income. - APS will be equal to zero at point B, as it indicates break-even level of income where savings (S) are zero or consumption (C) is equal to Income (Y), i.e. at OB₁ level of income. - 'OS₁' is the amount of dissavings at zero level of income. Thus, with respect to consumption curve, 'OS₁' signifies Autonomous Consumption at zero level of income. #### Average Propensity to Save (APS) From the savings function, we can find out the value of the savings-income ratio at every level of income. At any particular level of income, the ratio of the total savings to total income is called the *Average Propensity to Save (APS)*. **APS = S/Y** The APS gives the average savings-income relationship at different levels of income. **Meaning** Average propensity to save (APS) is the savings per unit of income, i.e. S/Y. #### Relationship between APC and APS At any particular level of income, APC is the ratio of consumption to income and APS is the ratio of savings to income. That is, APC = C/Y and APS = S/Y. Thus, the sum of the APC and APS is always equal to one. This is because income is either consumed or saved. **APC + APS = 1** Explanation: From the relationship between income, consumption and saving, we have Y = C + S Dividing both sides of the equation by Y we have, Y/Y = C/Y + S/Y ⇒1 = APC + APS APS = 1 – APC, and APC = 1-APS #### Consumption and Savings Schedules | Income (Y) | AY | Consumption (C) | AC | Savings (S = Y-C) | AS | APC (C/Y) | APS (S/Y) | MPC (AC/AY) | MPS (AS/AY) | |---|---|---|---|---|---|---|---|---|---| | 0 | 100 | 100 | | | | | | | | | 100 | 100 | 180 | 80 | -80 | 20 | 1.80 | -0.80 | 0.8 | 0.8 | | 200 | 100 | 260 | 80 | -60 | 20 | 1.30 | -0.30 | 0.8 | 0.8 | | 300 | 100 | 340 | 80 | -40 | 20 | 1.13 | -0.13 | 0.8 | 0.8 | | 400 | 100 | 420 | 80 | -20 | 20 | 1.05 | -0.05 | 0.8 | 0.8 | | 500 | 100 | 500 | 80 | 0 | 20 | 1 | 0 | 0.8 | 0.8 | | 600 | 100 | 580 | 80 | 20 | 20 | 0.97 | 0.03 | 0.8 | 0.8 | | 700 | 100 | 660 | 80 | 40 | 20 | 0.94 | 0.06 |0.8 | 0.8 | | 800 | 100 | 740 | 80 | 60 | 20 | 0.93 | 0.07 | 0.8 | 0.8 | | 900 | 100 | 820 | 80 | 80 | 20 | 0.91 | 0.09 | 0.8 | 0.8 | | 1000 | 100 | 900 | 80 | 100 | 20 | 0.90 | 0.10 | 0.8 | 0.8 | #### Important observations from Figure 3.2 and Table 3.2 1. As income increases in the economy, APC decreases whereas, APS increases. This means that as income increases in the economy, the proportion of income consumed decreases and the proportion of income saved increases. **Must know!** - Since income is either consumed or saved (Y = C + S), therefore, an increase in income is always equal to the sum of an increase in consumption