Draw a straight line saving curve for an economy and derive the consumption curve. Explain the method of derivation. Show a point on the consumption curve at which Average Propensity to Consume is equal to 1.

Following figure shows how consumption curve is derived from the saving curve:

It involves the following steps:

(i) We take OA =OA’. Because OA’

=negative saving when Y = 0 and this is exactly equal to minimum consumption when Y = 0.

(ii) Point Q on the T-line (45° angle) is marked corresponding to point P on the saving curve. Because at P, saving = 0 and at point Q, consumption = income (implying that S=0).

(iii) Joining points A and Q and stretching it to form a straight line, we get C curve. C function is linear as it is derived from a linear S function.

Since, MPC + MPS = 1, MPS = 1 - MPC. So that, while in C function, MPC is indicated by b, in S function, it is indicated by 1 -b. Point Q on the consumption curve is the point at which APC = 1