Worksheets › Class 12 › Determination of Income and Employment › Cheat sheet
Class 12 Determination of Income and Employment: cheat sheet
CBSE Social Science. How output is set by aggregate demand: the consumption function, MPC and MPS, equilibrium income, the multiplier, unplanned inventories and the paradox of thrift.
Key ideas
- The consumption function C = C̄ + cY has autonomous consumption C̄ and the marginal propensity to consume c.
- Extra income is either consumed or saved, so MPC + MPS = 1.
- Ex ante means planned; ex post means actual. In a two-sector model aggregate demand is planned C + I.
- Equilibrium output is where aggregate demand equals output; there planned saving equals planned investment.
- If output exceeds AD, unsold stocks pile up and firms cut output; if output falls short, stocks run down and firms raise output.
- A rise in autonomous spending raises income by a multiple, because each round of extra income is partly spent again.
- Paradox of thrift: if everyone tries to save more, income falls and total saving does not rise. Equilibrium below full employment means deficient demand; above it, excess demand.
Remember
| MPC and MPS | MPC = ΔC ÷ ΔY; MPS = ΔS ÷ ΔY = 1 − MPC |
| APC and APS | APC = C ÷ Y; APS = 1 − APC |
| Equilibrium income | Y = (C̄ + I) ÷ (1 − c) |
| Investment multiplier | k = 1 ÷ (1 − MPC) = 1 ÷ MPS |
| Change in income | ΔY = k × ΔI; investment needed = ΔY ÷ k |
| Saving at income Y | S = Y − (C̄ + cY) |
| Unplanned inventory change | output − AD, where AD = C̄ + I + c × output |
Watch out
- Using 1 ÷ MPC as the multiplier instead of 1 ÷ (1 − MPC).
- Forgetting autonomous consumption C̄ when working out consumption or saving.
- Saying inventories run down when output is above aggregate demand (they pile up).
Worked example
Suppose C = 150 + 0.75Y and I = 200 (₹ crore). Find equilibrium income, consumption and saving there.
Working: Y = (150 + 200) ÷ 0.25; C = 150 + 0.75 × 1,400
Answer: Y ₹1,400 crore; C ₹1,200 crore; S ₹200 crore (= I)
Practise Determination of Income and Employment
Revise with this page, then practise: every Determination of Income and Employment sheet in the app is new, with an answer key and working.
Coming soon for Android and iPhone.