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Revision Notes - AD and Components

The document provides an overview of aggregate demand and its components including households consumption, firms investment, government expenditure, and net exports. It defines aggregate demand and shows the aggregate demand equation for 2, 3, and 4 sector economies. It also discusses concepts related to consumption including autonomous consumption, marginal propensity to consume, average propensity to consume, and the consumption function.

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10 views1 page

Revision Notes - AD and Components

The document provides an overview of aggregate demand and its components including households consumption, firms investment, government expenditure, and net exports. It defines aggregate demand and shows the aggregate demand equation for 2, 3, and 4 sector economies. It also discusses concepts related to consumption including autonomous consumption, marginal propensity to consume, average propensity to consume, and the consumption function.

Uploaded by

sairamsrinivasan36
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Aggregate Demand and Its Components - Revision Notes

Unit No Unit of an economy Demand

1 Households Consumption (C)

2 Firms Investment (I)

3 General Government Expenditure on goods and services (G)

4 Foreign sector Net Exports (X - M)

Aggregate Demand (AD): It is the total demand for all the goods and services produced in an
economy in a year.

Aggregate
Demand

in 2 sector in 3 sector in 4 sector


economy economy economy

AD = C + I AD = C + I + G AD = C + I + G + ( X-M)

Autonomous Consumption: Minimum level of consumption at zero income - Possible through


Dissaving - Sale of asset, borrowings or current transfer
Marginal Propensity to Consume (MPC): Ratio of change in consumption to change in income
MPC = ∆𝐶/∆𝐼

Consumption Function - C = C̅ + bY
Break Even point or B is where C = Y
At zero income, autonomous consumption through dissaving. As income increases consumption
also increases but the increase in consumption is less in proportion to income.
Average Propensity to Consume (APC): Ratio of consumption to income - APC = C/Y

Saving function: Relationship between saving and income - S = - c̅ + Y(1-b)


At zero income, there will be dissaving to finance autonomous consumption.
As income increases savings will also increase but increase in saving will be more in proportion
to increase in income. At Break Even point, zero savings
Average Propensity to Save (APS): Ratio of saving to income - APS = S/Y
Marginal Propensity to Save (MPS): Ratio of change in saving to change in income
MPS = ∆𝑆/∆𝑌

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