Class 12 Economics Chapter 4 INCOME DETERMINAN
NCERT Notes for Class 12 Economics Chapter 4 INCOME DETERMINAN, (Economics) exam are Students are taught thru NCERT books in some of the state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students to prepare for evaluation. Students need to clear up those exercises very well because the questions inside the very last asked from those.
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NCERT Notes for Class 12 Economics Chapter 4 INCOME DETERMINAN
Class 12 Economics Chapter 4 INCOME DETERMINAN
Movement along a Curve and Parametric Shifts of a Curve:
Changes in a graph due to the changes in the Variables of it’s equation is called Movement along a Curve. For example in the equation y= a+bx, when there is a change in one unit of x leads to ‘b’ unit change in ‘y’.
The change in the position of the graph due to the change in the parameters is called Parametric Shift. The following diagram shows the two types of Parametric Shifts.
EX Ante and Ex Post
The planned or intended value of a Variable is called Ex Ante. The actual or realised value of a Variable is called Ex Post.
EX Ante Consumption :
The planned values of Consumption in an economy is called ex ante Consumption. People spent a major portion of their Income for Consumption and rest for saving. So Income is the sum of Consumption and Savings. Y = C +S .There is a functional relationship exist between Consumption and income. It is called Consumption function or propensity to consume. Mathematically it can be written as follows.
𝑪 = 𝒇 (𝒚)
The ratio between Consumption and Income is called Average Propensity to Consume ( APC).
The ratio between Savings and Income is called Average Propensity to Save ( APS).
The ratio between change in Consumption and change in Income is called Marginal Propensity to Consume ( MPC).
The ratio between change in Savings and change in Income is called Marginal Propensity to Save ( MPS).
Relationship between APC and APS. MPC and MPS.
Ex ante Consumption includes both Autonomous Consumption and Income level Consumption. The level of Consumption at the Income level zero is called Autonomous Consumption. It is denoted by
C and Income level Consumption is denoted with c.y.
(here c is MPC and y is level of income. Then we can write ex ante aggregate consumption
Can be written as follows. Here C = ex ante Aggregate Consumption,
C = autonomous Consumption, c= MPC ,y= income
C = C + c.Y
EX ANTE AGGREGATE INVESTMENT
Ex ante investment is what the investors plan or intends to invest at different levels of income in the economy. Investment demand in an economy mainly depends on Marginal Efficiency of capital. MES is the expected annual returns of an additional unit of investment. We assume that the investment Demand I as autonomous investment in the economy.
So I = Ī
EX ANTE AGGREGATE DEMAND ( AD) :- Aggregate Demand is defined as the total demand for all final goods and services produced in the economy in an accounting year.It is the Aggregate Expenditure of the economy on goods and services. In a simple economy with two sectors, the aggregate demand is the sum of Consumption Expenditure and Investment Expenditure.
AD = C+I , AD = C +cy + Ī , AD = Ā + cy
The following is the aggregate demand curve.
Aggregate Supply is defined as the total supply of all final goods and services produced in the economy in an accounting year. It is also termed as Aggregate output of final goods and services. It is always equal to Aggregate income of the economy. That is, AS = Y Aggregate Supply Curve is a 45° line.
INCOME DETERMINATION (PRODUCT MARKET EQUILIBRIUM)
In an economy, income and employment are in equilibrium when Aggregate Demand for final goods and services (AD) and Aggregate Supply or Aggregate Output (AS) are equal.
EXCESS DEMAND & DEFICIENT DEMAND
When AD rises above AS, there will be Excess Demand. (Inflationary Gap),When AD falls below AS, there will be Deficient Demand. (Deflationary Gap), When AD = AS, it is
called Effective Demand
AD > AS EXCESS DEMAND
AD < AS DEFICIT DEMAND
AD = AS. EFFECTIVE DEMAND
The following diagram shows equilibrium of a two sector economy.
OUTPUT MULTIPLIER OR AUTONOMOUS EXPENDITURE MULTIPLIER :
The ratio between change in income and change in any autonomous component is known as output
multiplier. That is,
When autonomous expenditure increases, Income of Economy increases as a multiple of the increase in autonomous expenditure and vice versa. So the change in income as a result of change in autonomous expenditure can be written as following.
It can be graphically shown as follows When there is an increase in Autonomous Expenditure, aggregate demand curve will shift parallel to upward direction. So, the Equilibrium demand and income will increase
When Investment expenditure increases, Income of Economy increases as a multiple of the increase in Investment expenditure and vice versa. So the change in income as a result of change in Investment expenditure can be written as following.
PARADOX OF THRIFT
If all the people of the economy increases the proportion of income they save (ie, if the MPS increases), the Aggregate Savings of the economy will not increase. It will either decline or remain unchanged.
The reason for this is the relationship between MPC and MPS. When MPS rises, MPC will fall which causes a fall in C, AD, Income, Saving etc.
- The aggregate demand function is AD= I00 + .754
- Calculate the equilibrium income’
- If Autonomous expenditure increased to 150 from I00 calculate the change in equilibrium income.
- In a two sector economy, consumption function C = 80 + 0.6 y, Autonomous Investment I = 50 crores.
- Calculate the value of output multiplier. (Score : 1)
- Find the aggregate demand and equilibrium income in the economy. (Scores : 3)
- If investment increases to ₹ 60 crores calculate its effect on equilibrium income. (Score : 1)
- In an economy investment increases by 500crores. If MPC is 0.5,what is increase in total income?
- Distinguish between Ex ante and Ex post.
- When income of a consumer increases to ₹ 500,his consumption expenditure changes by ₹ 300. Since
∆y = ∆C +∆S prove that mpc+mps=1.Calculate the value of mpc and mps.