Economics Class 12 Revision Notes Macroeconomics Chapter 4 Income Determination

1.Aggregate Demand (AD)
It refers to the total demand for final goods and services in an economy during a year.
(i) Components of Aggregate Demand
(a)Private consumption demand (C)
(b)Private investment demand (1)
(c)Demand for goods and services by the government or government purchases (G)
(d)Demand for net exports (X-M)
Thus, AD = C + I + G + NE

2.Aggregate Supply (AS)
It refers to the total quantity of goods and services produced by all the producers in an economy during a year.
(i) Components of Aggregate Supply
(a) Consumption (C)
(b) Saving (S)
Thus, AS = C + S

3.Consumption Function
It means a functional relationship between total consumption and total disposable income.
Thus,, C = f (y)
C = Consumption Y = Income

4.Average Propensity to Consume APC=C/Y
C= Total consumption, Y – Total income

5. Marginal Propensity to Consume (MPC)
ecnomics-class-12-revision-notes-macroecnomics-chapter-4-income-determination-01

11.Effective Demand
It is that level of aggregate demand which becomes effective in determining equilibrium level of income because it is equal to aggregate supply.

12.Autonomous Consumption
It refers to minimum level of consumption even when income is zero, it is indicated by ‘A’ in the consumption function
C=A+B

13.Ex-ante Saving
It is what the savers plan to save at different levels of income in the economy.

14.Ex-ante Investment
Is what the investors plan or intend to invest at different levels of income in the economy.

15.Ex-post Saving and Investment
They refer to realised saving and investment in the economy. Ex-post saving is always equal to ex-post investment.
ecnomics-class-12-revision-notes-macroecnomics-chapter-4-income-determination-02
17.Full Employment Equilibrium
It refers to that situation in the economy when AH = AS along with fuller utilisation of labour force.

18.Under Employment Equilibrium
It refers to that situation in the economy when AS – AD but without the fuller utilisation of labour force.

19.Parodox of Thrift
Which states that as people become more thrift they end up saving less or same as before.