Question

“Saving curve can be derived from the consumption curve”

Justify the statement, citing valid steps with the help of a well-labelled diagram.

Answer 1

Given consumption curve (C) intersecting 45o line at B (Break-even level of income). Steps for derivation of saving curve from the consumption curve are as follows:

1. Take OA with a negative intercept on the Y-axis equals OC (Autonomous consumption) with a positive intercept on the Y-axis as the starting point for the savings curve. 
2. Draw a perpendicular from point B (Y=C) that intersects the X-axis at B' (S=0), another point on the saving curve.
3. To obtain the saving curve (AS), join points A and B' and extend the line to point S.