Question

Given Consumption Curve, derive Saving Curve and state the steps taken in the process of derivation. Use diagram.

Answer 1

Given Consumption Curve CC’ the steps in derivation of Saving Curve are:

(i) Take OS equal to OC.

(ii) Draw a 45^o line on OX-axis from point O intersecting CC’ at point B.

(iii) Draw a perpendicular from B to intersect X-axis at B’.

(iv) Joint S and B’ and extend it to derive Saving Curve SS’.

Detailed Answer:

Consumption and Saving Curves are Complementary Curves.

(i) We know that income (Y) is the sum total of consumption (C) and savings (S) as income is either consumed or saved. It means, consumption and saving curves are complementary curves.

(ii) We can derive saving curve from the consumption curve. In the diagram, CC is the consumption curve and the 45^o line (OY) represents income. Consumption, at zero level of income, is equal to OC  (autonomous consumption). The amount of saving is indicated by vertical distance between consumption curve and income line. So savings, at zero level of income, will be OS (= - OC). It means, the saving curve will start from point S on the negative Y-axis.

(iii) CC intersects OY at point E (Break-even point) where savings are zero. Draw a perpendicular on the X-axis (point K) at the income level where the consumption curve and 45^o line intersect each other. Join S and K to obtain saving curve.

(iv) Beyond point E (Break-even point) consumption is less than income. Therefore, savings are positive as saving curve is above the X-axis. As income increases, saving also increases.