Propensity to consume
Average propensity to consume: Ratio of total consumption to total income. Symbolically, APC=C/Y
Marginal propensity to consume: Ratio of change in consumption to change in income. Symbolically, MPC=ΔC/ΔY
Propensity to save
Average propensity to save: Ratio of total savings to total income. Symbolically, APS=S/Y
Marginal propensity to save; Ratio of change in savings to change in income. Symbolically, MPS=ΔS/ΔY
Investment multiplier: Ratio of change in income to change in investment. Symbolically, K=ΔY/ΔI
Involuntary unemployment: Involuntary unemployment occurs when a person is willing to work at the prevailing wage but is unemployed.
Full employment: Full employment is a situation in which all available resources are being used in most economic ways.
AGGREGATE DEMAND
Meaning: Total planned expenditure on goods and services in the economy during a period of time
Components: ~Consumption(C) ~Investment(I) ~Government spending(G) ~Net exports(X - M) ~S.A.D = C+ I+ G+ (X - M)
PROBLEMATIC SITUATIONS AND THEIR MEASURES
Excess demand: It refers to a situation in which aggregate demand is an excess of aggregate supply corresponding to full employment level. Problems: Rise in prices, Rise in inflation, Deficit currency value.
Deficit demand: It refers to a situation where aggregate demand is deficit of aggregate supply. Problems: Involuntary unemployment, Price falls, Lock out of industries.
Measures: Change in government savings, Change in availability of credit, Change in quantitative investments like bank rate, Change in government policies.