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CBSE 2016 Class 12 Economics Outside Delhi Set-1

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Question : 16 of 19
Marks: +1, -0
Given saving curve, derive consumption curve and state the steps in doing so. Use diagram.
Solution:  
Steps of Deriving the consumption curve from saving curve :
(i) Draw 45∘45^{\circ} line from the origin.
(ii) Take OC equal to OS on Y-axis
(iii) Draw perpendicular line form BB to RR on OXO X axis which intersect 45∘45^{\circ} line at point BB.
(iv) Join CC and BB and extend it to get consumption curve CCCC .
In the given figure, a straight line saving curve is plotted showing saving function at different levels of income. It shows negative saving at zero level of income and zero saving level at OR level of income. At point RR, consumption expenditure = income, whereas to the left of RR, consumption expenditure is less than income.
At zero level of income, consumption expenditure is shown as OCO C which is equal to dissaving of OS,OC=OSO S, O C=O S. Thus CC is the starting point of consumption curve. At OR level of income, saving is zero, it shows that consumption expenditure must be equal to income of ORO R. This enables to plot ODO D as consumption expenditure equal to ORO R, which in turn gives a point BB on 45 degree line showing ODO D equal to OR. Thus B becomes the point on proposed consumption curve.
BB is the point on consumption curve at which total consumption expenditure (C)(C) is equal to income (Y). At point B, APC (CY)=1\left(\frac{C}{Y}\right)=1.
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