Page Contents

Revision Notes for Class 12 Macro Economics Chapter 4 – Free PDF Download
CBSE Class 12 economics revision notes chapter 4 Determination of Income and Employment
Revision Notes
CLASS 12 Macro ECONOMICS REVISION NOTES
CBSE CLASS 12 STUDY MATERIALS

Revision Notes for Class 12 Macro Economics

Chapter 4 – Free PDF Download
Free PDF download of Class 12 Macro Economics Chapter 4 – Determination of Income and
Employment Revision Notes & Short Key-notes prepared by our expert Economics teachers
from latest edition of CBSE(NCERT) books.

Do you need help with your Homework? Are you preparing for Exams?
Study without Internet (Offline)

DOWNLOAD PDF FOR FREE

CBSE Class 12 economics revision notes

chapter 4 Determination of Income and
Employment Revision Notes
Aggregate Demand refers to total value of all final goods and services that are planned to
buy by all the sectors of the economy at a given level of income during a period of
time. AD represents the total expenditure on goods and services in an economy during a
period of time.

Components of Aggregate demand are:

CoolGyan.Org | A Portal For Complete Education | 1

(i) Household consumption expenditure (C).

(ii) Investment expenditure (I).

(iii) Govt. consumption expenditure (G).

(iv) Net export (X – M).

Thus, AD = C + I + G + (X – M)

In two sector economy AD = C + I

Aggregate Supply is the money value of all final goods and services available for purchase by
an economy during a given period. It is the flow of goods and services in the economy. Since,
money value of final goods and services is equal to net value added, AS is nothing but the
national income.

AS = C + S

Aggregate supply represents the national income of the country.

AS = Y (National Income)

Consumption function shows functional relationship between consumption and Income.

C = f(Y)

where C = Consumption

Y = Income

f= Functional relationship.

CoolGyan.Org | A Portal For Complete Education | 2

Equation of Consumption Function

C= + MPC * Y

C = Consumption

= Autonomous consumption.

MPC(b)= Marginal Propensity to consume

does not changed/affected by change in income. It is minimum level of consumption ,

even when income is zero. Consumption expenditure at zero level of income is called
autonomous consumption. It is income inelastic.

Induced consumption is the expenditure which is affected by change in income. It is indicated

by MPC × Y. Induced consumption is the portion of consumption that varies with disposable
income.

Propensity to consume:- It is a schedule that shows consumption expenditure at different

levels of income in an economy.

Consumption function (propensity to consume) is of two types:

(a) Average propensity to consume (APC)

(b) Marginal propensity to consume (MPC)

Average propensity to Consume (APC): It refers to the ratio between total consumption(C)
and total income(Y) at given level of income in the economy.

CoolGyan.Org | A Portal For Complete Education | 3

Important Points about APC

(i) APC is more than 1: as long as consumption is more than national income before the
break-even point, APC > 1.

(ii) APC = 1, at the break-even point, consumption is equal to national income.

(iii) APC is less than 1: beyond the break-even point. Consumption is less than national
income.

(iv) APC falls with increase in income.

(v) APC can never be zero: because even at zero level of national income, there is
autonomous consumption.

Marginal Propensity to Consume (MPC): Marginal propensity to consume refers to the ratio of
change in consumption expenditure to change in income.

Important Points about MPC

(1) Value of MPC varies between O and 1: If the entire additional income is consumed, then
ΔC = ΔY, making MPC = 1. However, if entire additional income is saved, than ΔC = 0,
making MPC = 0

(2) MPC is the slope of consumption curve and remain constant throughout in the short run.

CoolGyan.Org | A Portal For Complete Education | 4

(3) Value of APC > MPC

Saving function refers to the functional relationship between saving and national income.

S = f (y)

Equation of Saving function

S= +MPS.Y

where S = saving

Y = National Income

f = Functional relationship.

Saving function (Propensity to Save) is of two types.

(i) Average Propensity to Save (APS)

(ii) Marginal propensity to Save (MPS)

Average Propensity to Save (APS): Average propensity to save refers to the ratio of savings to
the corresponding level of income

Important Point about APS

(1) APS can never be 1 or more than 1 :As saving can never be equal to or more than income.

CoolGyan.Org | A Portal For Complete Education | 5

(2) APS can be zero: At break even point C = Y, hence S = 0

(3) APS can be negative: At income levels which are lower than the break-even point, APS
can be negative when consumption exceeds income.

(4) APS rises with increase in income.

Marginal Propensity to Save (MPS): Marginal propensity to save refers to the ratio of change
in savings to change in total income.

MPS varies between 0 and 1

(i) MPS = 1 if the entire additional income is saved. In such a case, ΔS = ΔY, then MPS = 1

(ii) MPS = 0 If the entire additional income is consumed. In such a case, ΔS = 0, then MPS = 0

(iii) Mps is the slope of saving curve.

(iv) MPS remains constant throughout in short run.

Relationship between APC and APS

The sum of APC and APS is equal to one. It can be proved as under we know:

APC + APS = 1

Y=C+S

Dividing both sides by Y, we get

CoolGyan.Org | A Portal For Complete Education | 6

APC + APS = 1

because income is either used for consumption or for saving.

Relationship between MPC and MPS

The sum of MPC and MPS is equal to one. It can be proved as under:

MPC + MPS = 1

We know

ΔY = ΔC + ΔS

Dividing both sides by ΔY, we get

MPC + MPS = 1 because total increment in income is either used for consumption or for
saving.

CoolGyan.Org | A Portal For Complete Education | 7

Investment refers to the expenditure incurred on creation of new capital assets.

The investment expenditure is classified under two heads:

(i) Induced investment

(ii) Autonomous investment.

Induced Investment: Induced investment refers to the investment which depends on the
profit expectations and is directly influenced by income level (only for reference).

Autonomous Investment: Autonomous investment refers to the investment which is not

affected by changes in the Level of income and is not induced solely by profit motive. It is
income inelastic.

Ex-Ante Savings: Ex-ante saving refers to amount of savings which all the household
intended to save at different levels of income in the economy at the beginning of period. It is
also known as planned savings.

Ex-Ante Investment: Ex-ante investments refers to amount of investment which all the firms
plan to invest at different level of income in the economy at the beginning of the period. It is
also known as planned investment.

Ex-Post Saving: Ex-post savings refer to the actual or realised savings in an economy during a
financial year at end of the period.

Ex-Post Investment: Ex-post investment refers to the actual or realised investment in an

economy during a financial year at the end of the period.

Equilibrium level of income is determined only at the point where AD = AS or S = I, .i.e. the
flow of goods and services in the economy is equal to the demand for goods and services But
it cannot always be at full employment level also as it can be at less than full employment.

CoolGyan.Org | A Portal For Complete Education | 8

Full employment is a situation when all those who are able and willing to work at prevailing
wage rate, get the opportunity to work.

Voluntary unemployment is a situation where person is able to work but not willing to work at
prevailing wage rate.

Involuntary unemployment is a situation where worker is able and willing to work at

prevailing wage rate but does not get work.

Under employment is a situation where all those who are able to work at existing wage rates,
are not getting jobs. It refers to that situation in the economy where AS = AD or S = I, but
without fuller utilisation of labour force.

Investment multiplier (K) is the ratio of change in income (ΔY) due to change in investment
ΔI.

Value of investment multiplier lies b/w 1 to infinitive.

Excess demand refers to a situation when aggregate demand exceeds aggregate supply
corresponding to full employment.

Inflationary gap is the gap by which actual aggregate demand exceeds the level of aggregate
demand required to establish full employment.

It measures the extent of excess demand.

Deficient Demand: When AD falls short of AS at full employment it is called deficient demand.
In other words, AD < AS at the level of full employment. It is called deficient demand.

Deflationary gap is the gap by which actual aggregate demand is less than the level of

CoolGyan.Org | A Portal For Complete Education | 9

aggregate demand required to establish full employment.

It measures the extent of deficient demand.

Methods to control excess demand or deficient demand:

1. Fiscal Measures or Fiscal Policy

a. Change in Tax

b. Change in Public expenditure

c. Change in Public borrowing

d. Deficit financing (Printing new notes)

2. Monetary Measures or Monetary Policy

a. Quantitative measures

i. Bank rate

ii. Cash Reserve Ratio

iii. Statutory Liquidity Ratio

iv. Open Market operation

b. Qualitative/Selective measures

i. Marginal requirement

CoolGyan.Org | A Portal For Complete Education | 10

ii. Rationing of credit

iii. Direct Action

iv. Moral Suasion

CLASS 12 Macro ECONOMICS REVISION NOTES

Chapter 1 – Introduction to Macro Economics
Chapter 2 – National Income Accounting
Chapter 3 – Money and Banking
Chapter 4 – Determination of Income and Employment
Chapter 5 – Government Budget and the Economy
Chapter 6 – Open Economy Macroeconomics
INDIAN ECONOMICS Development NOTES
All Subjects
CBSE CLASS 12 STUDY MATERIALS
NCERT Solutions for Class 12
Revision Notes for Class 12
Important Questions for Class 12
Formula for Class 12
Previous Year Question Paper for Class 12
Sample Paper for Class 12
Syllabus for Class 12
NCERT Exemplar Solutions for Class 12
RD Sharma Class 12 Maths Solutions
Ask your Doubts
All Classes

CoolGyan.Org | A Portal For Complete Education | 11