ECONOMICS

XII-(2023-24)

PART -1

VIDEO
NOTES
 MEANING
AGGREGATE DEMAND (AD)

It refers to Total demand for all Final

goods and services in an economy during
a fiscal year
(1st April to 31st March)

COMPONENTS
OF AD
 COMPONENTS
OF AD

1.Private Final Consumption Expenditure (C)

It is also called household expenditure.

It depends on the level of disposable income
of household.
Higher the level of Disposable income, higher
will be private final consumption expenditure
and vice versa.

2. Private Investment Expenditure (I)

It refers to expenditure by private investors on

the purchase of such goods which add to their
stock of capital i.e. investment
Two Types of investment:-

(i) Induced investment: It

refers to the investment,
which is made with the
motive of earning profit. It is
generally done in private
sector. It depends upon level
of income Induced
investment curve moves
upwards from left to right

(ii) Autonomous investment: It

refers to the investment, which is
made irrespective of level of
income. It is generally done by
government with the motive of
social welfare. Autonomous
investment curve remains parallel
to X-axis. It is constant
irrespective the level of income
Marginal efficiency of
investment (MEI): It refers to the
expected rate of return on
additional investment.
G: GOVERNMENT
EXPENDITURE

3. Government final
consumption expenditure
(G):

It refers to the expenditure

incurred by government on
consumer goods to meet public
needs like law and order,
education, health, transport,
defense, etc.

4. Government investment
expenditure (G):

It refers to the expenditure

incurred by the government on
Capital goods. These
expenditure are need to
develop the economy. Like
construction of highways,
roads, hospital building, school,
power plant, etc.
5. Net Export (X – M) : Expenditure by the
foreigners on our goods is added to total
expenditure (AD) while expenditure on imports is
subtracted.

So difference between export and imports is

considered as a component of Aggregate
Demand.
So AD = C + I + G + (X – M)
But in two sector economy.
AD = C + I
C = Desired consumption, I = Desired Investment

SCHEDULE
 Important Points

(i)Consumption expenditure (c) can never

be zero. At level of income there should
be a minimum consumption. It is essential
even when income does not permit it. It is
also called autonomous consumption
expenditure past savings and borrowings
may be the source of such expenditure.

(ii)Investment is assumed to be constant

irrespective the level of income.
i.e. Autonomous investment.

(i)Consumption can never be zero. Hence

AD also can never be zero because AD is
the sum of consumption and investment.
ECONOMICS
XII-(2023-24)

PART -2

VIDEO
NOTES
 AGGREGATE
SUPPLY (AS)

It is the total production or supply of all goods and

services in the economy during fiscal year.

(i)Consumption: It is the part of income which is spent

on consumption (c).

(ii)Savings: It is the part of income which is not

consumed i.e. saved. (S).

(iii)Initially saving is negative but after a stage it is

positive.

AS= C + S (Y = C + S)
AS is 45 degree line
AS (Output) = Y (National income)
 SCHEDULE

WHY AS IS 45
DEGREE LINE ?

Significance of 45° degree line (why AS is 45° line)

Aggregate supply refers to money value of final goods
and services that all producers are willing to supply in an
economy during a fiscal year.
Before giving reason why AS is 45° line we must know
that Y = C + S
Y = National income
C = Consumption expenditure
S = Savings
AS = C + S
Aggregate Supply is obtained by Adding Consumption
and Savings so we can say AS=Y
Each point on AS line is equidistant from both axis AS
line Bisect the 90° angle.
X axis shows level of income &
Y axis shows consumption + Saving
Under Keynesian Economic Analysis
Y=C+S
Hence AS is 45° line

Break even
point

It is a point
where income
is equal to
consumption.
savings are
equal to Zero
ECONOMICS
XII-(2023-24)

PART -3

VIDEO
NOTES
 EQUILIBRIUM LEVEL
OF OUTPUT/ INCOME

I.AD-AS Approach: In this approach, equilibrium level

output (GDP) is achieved when aggregate demand is
equal to aggregate supply. i.e. [AD = AS]

SCHEDULE
What happens if AD > AS ?
What happens if AD > AS ?
• •When
WhenAD ADisisgreater
greaterthan
thanAS,AS,
flow of goods and services
flow of goods and services in in
the
the economy
economy tends
tends toto be
be less
less
than
thantheir
theirdemand.
demand.
• • Producers
Producers need
need toto produce
produce
more
moregoods
goodsand
andservices
servicesininthe
the
economy.
economy.
• •Whole
Wholeexisting
existingstock
stocksold
soldout
out
producers would suffer the loss
producers would suffer the loss
ofofunfulfilled demand.
unfulfilled demand.

What happens if AD < AS ?

What happens if AD < AS ?
• When AS is more than AD,
• When AS is more than AD,
flow of goods and services in
flow of goods and services in
the economy tends to exceed
the economy tends to exceed
their demand.
their demand.
• As a result, some of the
• As a result, some of the
goods would remain unsold.
goods would remain unsold.
• To clear unwanted stock, the
• To clear unwanted stock, the
producer would plan a cut in
producer would plan a cut in
production. Consequently, AS
production. Consequently, AS
would reduce to become equal
would reduce to become equal
to AD.
to AD.
II. S-I Approach:

In saving investment approach equilibrium level of

output (GDP) is achieved when planned saving is equal
to planned investment. i.e. [S = I]

SCHEDULE

Point “e” is equilibrium

point where

(S = I) at full employment
level of income ₹200.
What
Whathappens
happens ififSAD
> I ?> AS ?

• ItWhen
implies
AD isthat whenthan
greater planned
AS,
savings (S) is greater than the
flow of goods and services in
planned investments (I) is to the
the economy
circular flow
tendsofto beincome.
less
than their demand.
Accordingly, overall expenditure in
the economy would remain lower
• than
Producers
what isneed requireto toproduce
buy the
more goods
planned and services in the
output.
Some output would remain unsold
economy.
and producers will have undesired
stock. To clear their stocks, the
• Whole existing stock sold out
producer would now plan lesser
producers
output. wouldThe suffer the would
process loss
ofcontinue
unfulfilled
till Sdemand.
= I.

What happens if AD < AS ?

What happens if S < I ?
• When AS is more than AD,
It implies
flow of that
goodsplanned
andsavings (S) isin
services
less than planned investments (I) into
the economy
the circular flowtendsofto income.
exceed
their demand.
Accordingly, overall expenditure in
• As
the a result,
economy would some
turn outof the
to be
greater
goods thanwouldwhat is required
remain to buy
unsold.
the planned output. Here the
• To clear unwanted stock, the
producers would suffer the losses of
producerdemand.
unfulfilled would To plan a cutthein
manage
production.
situation, Consequently,
the producer would now AS
would
plan reduce
higher to become equal
production.
The process would continue till S = I
to AD.
ECONOMICS
XII-(2023-24)

PART -4

VIDEO
NOTES
A.Excess Demand

It refers to the situation when aggregate

demand (AD) is in excess of aggregate supply
(AS) corresponding to full employment level of
output in the economy.

AD > AS
Inflationary gap is
⇒ AD1 – AD
Causes of Excess Demand and Inflationary
Gap

(i)increase in private final consumption

expenditure.

(ii) increase in private investment expenditure.

(iii)increase in govt. final consumption

expenditure.

(iv)increase in govt. investment expenditure.

(v)Increase in exports, owing to lower domestic

prices in relation to international prices.

(vi)Decrease in imports, owing to higher

international prices as compared to domestic
prices.

(vii)A cut in tax rates leads to higher disposable

income of people.
B. Deficient Demand

It refers to the situation when aggregate

demand (AD) is less than aggregate supply
(AS) corresponding to full employment in the
economy.

AD < AS
Deflationary gap is
⇒ AD – AD1
 Causes of Deficient Demand and
Deflationary Gap

(i)Decrease in private final consumption

expenditure.

(ii)Decrease in private investment

expenditure.

(iii)Decrease in government
expenditure.

(iv)Decrease in exports and increase in

imports.

(v)Increase in tax rate leads to decrease

in disposable income of people.
 (i)Full employment:

It refers to a situation when all those who are

able to work and are willing to work (at the
existing wage rate) are getting work. It is a
situation when, corresponding to a given wage
rate, demand for Labour force is equal to supply
of Labour force and the Labour market is in
equilibrium. However, full employment does not
mean that there is no unemployment in the
economy. Some people may voluntarily choose to
remain unemployed they are not be willing to work
at all or not willing to work at the existing wage
rate. This is a situation of voluntary unemployment.
i.e. in full employment situation unemployment
can be occurs like
 TYPES OF UNEMPLOYMENT

(a)Structural unemployment: It refers to the situation of

unemployment where poor people remains unemployed due to
modernization or structural changes in the economy like due to
computerization many unskilled peoples are unemployed.

(b)Frictional unemployment: When a person leave one job and

find other job then the time period at which he is unemployed for
some days. That is called frictional unemployment.

(c)Voluntary unemployment occurs when some people are not

Willig to work at all or are not willing to work at an existing wage
rate.

(d)Involuntary unemployment occurs when some people are not

getting work, even when they are willing to work at an existing
wage rate. Here economy fails to create enough jobs because
planned output is lower than the potential output.
ECONOMICS
XII-(2023-24)

PART -5

VIDEO
NOTES
 Measures to correct Excess
demand & deficient demand

A. Fiscal measures (By the

government)
B. Monetary policy (By RBI)

A. Fiscal Policy (Fiscal Measures) It refers

to budgetary policy of the government to
correct the situation of excess demand and
deficient demand.

Common instruments are

a) government spendings
b) Taxation policy
 Components of Fiscal Policy (instruments)
(i)Government spending: It refers to the
expenditure of govt. on public welfare works
such as construction of roads, dams, bridges,
expenditure on education, defence, maintenance
of laws, etc.
To correct situation of excess demand govt.
reduces their all expenditures. So that less
income generation in the economy and
consequently AD will be less as require to correct
excess demand.
To correct situation of deficient demand govt.
increases their all expenditure. So that more
income generation in the economy. And
consequently AD will be more as required to
correct deficient demand

(ii) Taxation policy: Taxes are a compulsory payment made

to the government under any law. By increasing tax burden
on the households and the producers govt. reduces the
purchasing power in the economy on the other hand by
lowering the tax burden, the government increases the
purchasing power and excess demand and deficit demand
are corrected
B. Monetary measures:
1. Quantitative Measures.
2. Qualitative Measures

1. Quantitative Measures Quantitative

instruments are traditional tools related to the
Quantity or Volume of the money. These are also
called general tools. It comprises of the following
instruments
ECONOMICS
XII-(2023-24)

PART -6

VIDEO
NOTES
 PROPENSITY TO CONSUME &
PROPENSITY TO SAVE

APC (Average Propensity to Consume) It is the

part of income which is consumed. (or) It shows
the relationship between consumption and
income.
APS (Average Propensity to Save) It is
the part of income which is saved. It shows
the relationship between savings and
income.

MPC (Marginal propensity to consume) It

shows change in consumption due to change in
income. MPC is always more than zero less than
one.

MPS (Marginal propensity to save) It shows

change in savings due to change in income.

MUST REMEMBER
ECONOMICS
XII-(2023-24)

PART -7

VIDEO
NOTES
Consumption Function
The functional relationship between C
and Y is called consumption function.

Saving Function
It is the functional relationship
between S and Y (income)
S = – a + (1 – b)Y
Here S = Saving
 Note:
• MPC is slope of consumption function.
• MPC is constant at each level.
• MPS is slope of saving function
• MPS is constant for a straight line S-function

1.S-line must start from the point which indicate that the value of S
(the value of S when Y = 0) corresponds to the value of C (the value
of C when Y = 0).

Here S-line starts from –20 where C line starts from +20 because C
= 20, Y = 0 and S = –20.

2. S-line must cross the X-axis when (Y = C) so that S = 0. Thus S-

line crosses X-axis when Y = C = 100 and therefore S = 0.

3. The slope of S-line must be equal to (1 – slope of C-line) while

slope of C line is 0.8 = MPC and slope of S line is (1 – MPC) i.e. 0.2
i.e. MPS.
ECONOMICS
XII-(2023-24)

PART -8

VIDEO
NOTES
 INVESTMENT
MULTIPLIER

It measures change in income due

to change in investment in the
economy. We have noted that
increase in income is many times
more than the increase in
investment. The number of times by
which the increase in income
exceeds the increase in investment
is called investment multiplier or
output multiplier. It is denoted by
“K”

Conclusion
There is inverse relationship between MPC & MPS as value of MPC
increases then value of MPS decreases as shown in above
schedule.

* There is inverse relationship between multiplier and MPS. Higher

the value of MPS, lower the value of multiplier & vice versa
.
* There is a direct relationship between multiplier and MPC.
Higher the value of MPC, higher the value of multiplier and vice
versa as shown in above schedule.
 WORKING OF INVESTMENT MULTIPLIER
WITH A NUMERICAL EXAMPLE.

The above table clearly shows that initial increase in investment

of `100 crores has resulted in an increase of additional income
of `500 crores. i.e. the resultant increase in income is 5 times
the initial investment.

•Ex – ante saving: It refers to planned saving in an economy in a

year.

•Ex – ante investment: It refers to planned investment in an

economy in a year.

•Ex – post investment: It refers to the actual amount of

investment in an economy during a year. * Ex-post saving : It
refers to actual savings in an economy in a year
ECONOMICS
XII-(2023-24)

PART -9

VIDEO
NOTES
 PRACTICE
QUESTION
Q.1) From the following data, Calculate the (a) Consumption
expenditure and (b) Investment expenditure for the economy

Q.2) Find “Investment” from the following:

National income = ₹800
Autonomous consumption = ₹50
MPC = 0.8

Q.3) Find consumption expenditure from the following:

Autonomous consumption = ₹200
MPC = 0.75
National income = ₹1,500

Q.4) Calculate MPC from the following:

(i) Investment ₹350
(ii) Consumption expenditure at zero level income ₹20
(iii) National Income 1000.
ECONOMICS
XII-(2023-24)

PART -10

VIDEO
NOTES
Q.5) In an economy, C = 300 + 0.8Y and I = 500 (where C =
Consumption,
Y = Income, I = Investment). Calculate the following:
a)Equilibrium level of income
b)Consumption expenditure at equilibrium level of income

Q.6) If in economy, C = 500 + 0.9Y and I = 1,000 crores,

Where C = consumption expenditure, Y = National income, I =
Investment. Calculate the following:
i)Equilibrium level of income
ii)Value of investment multiplier.

Q.7) An economy is in equilibrium. The economy’s

consumption function is
C = 100 + 0.5Y
where C is consumption expenditure and Y is national
income. National income is 1000.
Find out investment expenditure,
MPS and
Investment Multiplier.

Q.8) The consumption function for an economy is

: C = 20 + 0.8Y

(assuming amount in ₹ crores). Determine the

level of income when average propensity to
consume will be one.
Q.9) Given consumption function C = 100 + 0.75Y
and investment expenditure ₹1000.

Calculate
(a) equilibrium level of national income
(b) consumption expenditure at that level.

Q.10) The saving function of an economy is given

as: S = -10 + 0.20 Y.

if the ex-ante investment are ₹240 crores,

calculate the following:
(i) Equilibrium level of income in the economy
(ii) Additional investments which will be needed
to double the present level of equilibrium
income

Q.11) The function of Saving (s) is given to be: S =

-40+0.25Y.

If planned investments are ₹100 crores,

determine:
a)Equilibrium level of income
b)Level of consumption at equilibrium
c)Savings at equilibrium
Q.12) In an economy, S = –100 + 0.6Y is the saving
function.

Where S is saving and Y is national income if

investment expenditure is ₹1100. Calculate:
(i) equilibrium level of national income.
(ii) Consumption expenditure at that level of
income

Q.13) Answer the following questions based on

the data given below:

i)Planned investment = ₹100 crore

ii)C = 50 + 0.5 Y
a)Determine the equilibrium level of income
b)Calculate the saving and consumption
expenditure at equilibrium level of National
Income.
ECONOMICS
XII-(2023-24)

PART -11

VIDEO
NOTES
 Q.14) Calculate MPC is
Investment Multiplier is 4

Q.15) In an economy, MPC = 0.75. What will be

he effect on total income if investment
increase by ₹300 crores.

Q.16) In an economy 75% of increased in income is

spend an consumption. Investment is increased
∆
by ₹1000 crore. Calculate Y (increase in
∆
income) and C (total increase in C).

Q.17) In an economy the equilibrium level of

income is ₹12000 crore. The ratio of marginal
propensity to consume and marginal propensity
to save is 3:1. Calculate additional investment
needed to reach a new equilibrium level of
income of ₹20,000 crore.
Q.18) In an economy, with every increase in
income 10% of the rise in income is saved.
Suppose a fresh investment of ₹120 crores takes
place in the economy.

Calculate (i) change in income

(ii) change in consumption.

Q.19) On the basis of consumption function C = 120

+ 0.40Y
Calculate: (i) Saving function
(ii) Determine saving at ₹500 level of income.
(iii) At what level of income saving becomes
zero?

Q.20) In an economy, an increase in investment

leads to increase in national income which is
three times more than the increase investment.
Calculate marginal propensity to consume.
Q.21) An increase of ₹250 crores in investment in
an economy resulted in total increase in income
of ₹1000 crores. Calculate the following:
(a) Marginal propensity to consume (MPC).
(b) Change in saving
(c) Change in consumption expenditure
(d) Value of multiplier.

Q.22) In an economy, investment is increased by

₹300 crore.
If marginal propensity to consume is 2/3,
calculate increase in National Income.
ECONOMICS
XII-(2023-24)

PART -12

VIDEO
NOTES
Q.23) Complete the following table:

Q.24) Complete the following table:

Q.25) The following table illustrate
the multiplier process after making
an additional investment of ₹1000
crores. Calculate missing values:

Q.26) Complete the following table:

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