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Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function Complete Details

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function :  Here we provide direct download links for Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function Important Notes in pdf format. Download and read well. In this article you can see Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function. Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function included are some topics those are :

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function Complete Details

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function :  Here we provide some  Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function all topics detail information in pdf format. These Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function Topics complete details under given bellow :

Topics of  Karnataka Class 12 Commerce Economics Chapter 8 National Income Accounting

1) Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment

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Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function : Consumption and savings are opposite by nature. The term consumption denotes expenditure and by savings we understand the act of preserving money for the future needs. Most of us are in the habit of meeting the present needs from our income. After that, if there remains anything, then only savings can be done. But in the long run, it is the savings that matters most.

CONCEPT OF SAVING

The concept of saving is important in the context of economics and finance. In general application, saving usually stands for depositing money separately for a particular purpose, for instance investment in retirement plan or depositing cash in the bank. In other words, savings means the reducing of expenditure and the act to avoid wastage. According to personal finance concept, saving means keeping or conserving money to be used in the future. Whereby usually the money is deposited, instead of investing it, where a risk factor is always involved. Saving is done with some pre-determined investment objectives. In other words, saving is the act of conserving cash for any purpose or for future usage. On the other hand, savings means the cash saved to that very moment. Examples of saving are: 1) Mr. Lim has been saving 20% of his earnings just because he is aiming to increase his savings so that it would be enough to purchase a car. 2) Miss Camille has been saving 35% of her earnings just because she wants to get her fiancée a nice wallet for his birthday.

Motives for Saving

People save so that they can consume more in the future.  A decision to spend now or save is really a choice of when to spend – now or in the future.  The decision depends on wealth, disposable income, real interest rates and tastes or preferences for spending now versus waiting.  While we will not engage in a complete discussion of the determinants of saving, the following examples will make some of the points.

Fred and Barney have the same income this year.  They are alike in all respect except that Fred gets a big inheritance from his beloved Aunt Matilida this year.  Who is likely to save more from this year’s income, Fred or Barney?  Answer: Fred has more assets that Barney, and can live better.  He is likely to spread his largess over several years, meaning that Fred will spend more this year than Barney.  In turn, this means less saving this year.

Fred and Barney have the same income this year.  They are alike in all respect except that Barney has a generous pension plan.  Fred has none.  Who is likely to save more from this year’s income, Fred or Barney?  Answer:  a true measure of assets includes funds in things like pension plans, not just in stocks, bonds and bank accounts.  The logic given above applies here, so that Barney is likely to spend more this year than Fred.  In turn, this means that Barney will save less this year.

Download here Karnataka Class 12 Commerce Economics Concepts Of Consumption Income Savings And Investment Complete Details in PDF Format

2) Karnataka Class 12 Commerce Economics Keynes Consumption Function Complete Notes

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function : In economics, the consumption function describes a relationship between consumption and disposable income. The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier. Its simplest form is the linear consumption function used frequently in simple Keynesian models:

{\displaystyle C=a+b\times Y_{d}}C = a + b \times Y_{d}

where {\displaystyle a}a is the autonomous consumption that is independent of disposable income; in other words, consumption when income is zero. The term {\displaystyle b\times Y_{d}}b \times Y_{d} is the induced consumption that is influenced by the economy’s income level. The parameter {\displaystyle b}b is known as the marginal propensity to consume, i.e. the increase in consumption due to an incremental increase in disposable income, since {\displaystyle \partial C/\partial Y_{d}=b} \partial C / \partial Y_{d} = b. Geometrically, {\displaystyle b}b is the slope of the consumption function. One of the key assumptions of Keynesian economics is that this parameter is positive but smaller than one, i.e. {\displaystyle b\in (0,1)}b \in (0,1).[

Keynes also took note of the tendency for the marginal propensity to consume to decrease as income increases, i.e. {\displaystyle \partial ^{2}C/\partial Y_{d}^{2}<0}{\displaystyle \partial ^{2}C/\partial Y_{d}^{2}<0}. If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope. Further theories on the shape of the consumption function include James Duesenberry’s (1949) relative consumption expenditure, Franco Modigliani and Richard Brumberg’s (1954) life-cycle hypothesis, and Milton Friedman’s (1957) permanent income hypothesis.

Some new theoretical works are based, following Duesenberry’s one, on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviorally-based aggregate consumption function. 

Download here Karnataka Class 12 Commerce Economics Keynes Consumption Function complete notes

3) Karnataka Class 12 Commerce Economics Investment Function Complete Notes

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function : The investment function is a summary of the variables that influence the levels of aggregate investments.The reason for investment being inversely related to the Interest rate is simply because the interest rate is a measure of the opportunity cost of those resources. If the resources instead of financing the investment could be invested in financial assets, there is an opportunity cost of (1+r), where r is the interest rate. This implies higher investment spending with a lower interest rate

Investment Function in an Economy: Importance, Types and Determinants.  Read this article to learn about the importance, types and determinants of investment function in an economy.

Importance:

The level of income, output and employment in an economy depends upon effective demand, which in turn, depends upon expenditures on consumption goods and investment goods (Y = C + I).

Consumption depends upon the propensity to consume, which, we have learnt, in more or less stable in the short period and is less than unity. Greater reliance, therefore, has to be placed on the other constituent (investment) of income.

Out of the two components (consumption and investment) of income, consumption being stable, fluctuations in effective demand (income) are to be traced through fluctuations in investment. Investment, thus, comes to play a strategic role in determining the level of income, output and employment at a time.

We can establish the importance of investment in another way also. In order to maintain an equilibrium level of income (Y = C + I), consumption expenditures plus investment expenditures must equal the total income (Y); but according to Psychological Law of Consumption given by Keynes, as income increases consumption also increases but by less than the increment in income. This means that a part of the increment in income is not spent but saved.

The savings must be invested to bridge the gap between an increase in income and consumption. If this gap is not plugged by an increase in investment expenditures, the result would be an unintended increase in the stocks of goods (inventories), which in turn, would lead to depression and mass unemployment. Hence, investment rules the roost. In Keynesian economics investment means real investment i.e., investment in the building of new machines, new factory buildings, roads, bridges and other forms of productive capital stock of the community, including increase in inventories.

It does not include the purchase of existing stocks, shares and securities, which constitute merely an exchange of money from one person to another. Such an investment is merely financial investment and does not affect the level of employment in an economy. An investment is termed real investment only when it leads to a increase in the demand for human and physical resources, resulting in an increase in their employment. Investment is a flow variable and its counterpart is stock variable called capital.

Download here  Karnataka Class 12 Commerce Economics Investment Function Complete Notes In PDF Format 

4)  Karnataka Class 12 Commerce Economics Multiplier Complete Notes

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Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function : In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. For example, suppose variable x changes by 1 unit, which causes another variable y to change by M units. Then the multiplier is M. Multipliers can be calculated to analyze the effects of fiscal policy, or other exogenous changes in spending, on aggregate output. For example, if an increase in German government spending by €100, with no change in tax rates, causes German GDP to increase by €150, then the spending multiplier is 1.5. Other types of fiscal multipliers can also be calculated, like multipliers that describe the effects of changing taxes (such as lump-sum taxes or proportional taxes).

What is a ‘Multiplier’

In economics, a multiplier is the factor by which gains in total output are greater than the change in spending that caused it. It is usually used in reference to the relationship between investment and total national income. The multiplier theory and its equations were created by British economist John Maynard Keynes.

BREAKING DOWN ‘Multiplier’

By “investment,” Keynes meant government spending. He believed that any injection of government spending created a proportional increase in overall income for the population, since the extra spending would carry through the economy.

The Mathematics of the Multiplier

In his 1936 book “The General Theory of Employment, Interest, and Money,” Keynes wrote following equation to describe the relationship between income (Y), consumption (C) and investment (I): Y = C + I. For any level of income, people spend a fraction and save/invest the remainder.

Keynes represented the marginal propensity to save (MPS) as 1-b, and the marginal propensity to consume (MPC) as b. This creates the equations C = bY, and I = Y – C. In other words, bY determines how much remains for investments. Keynes rearranged the equations to solve for income, or Y = I / (1-b).

Here, Keynes re-defined Y as k, writing k = 1 / (1-b). This allowed Keynes to assert Y = k*I. Since investment was multiplied by k, Keynes referred to k as the multiplier. For any new injection of government spending, k showed the relationship between change in income (dY) and change in investment (dI), or dY = k*dI.

Given an MPC = 0.8, for example, then k = 1 / (1 – 0.8) = 5. This suggested any change in income will be five times the change in new investment, or new government expenditures.

Problems in Multiplier Maths

In Keynes’ first derivation, income (Y) is treated as an independent variable, or a cause which drives other changes in the economy; after introducing the concept of k, but investment (I) and the multiplier (k) were suddenly independent variables. Income became a dependent variable, or an effect.

Keynes’ multiplier reversed cause and effect after k was introduced. While still mathematically true, this reversal only demonstrated a necessary accounting relationship in Keynes’ equation, not any meaningful causal relationship.

For an analogy, consider the equation for converting Celsius into Fahrenheit: F = 32 + 1.8C. Here, an increase in 10 degrees Celsius implies an increase of 18 degrees Fahrenheit. This can be expressed mathematically as dF/dC = k, where k is a Celsius multiplier. (Mathematically, this is identical to the Keynesian multiplier.)

It would not make much sense to claim a 10-degree rise in Celsius causes an 18-degree rise in Fahrenheit. The two may be mathematically related in a fixed equation, but there is no sensible causal link involved. The same goes for Keynesian multipliers.

In fact, a derivation of the Keynesian multiplier can be written dY / dC = 1/b. With an MPC = 0.8, a change in income is only 1.25 times the change in new expenditures, not five times.

The multiplier effect in an open economy

As well as calculating the multiplier in terms of how extra income gets spent, we can also measure the multiplier in terms of how much of the extra income goes in savings, and other withdrawals. A full ‘open’ economy has all sectors, and therefore, three withdrawals – savings, taxation and imports.

This is indicated by the marginal propensity to save (mps) plus the extra income going to the government – the marginal tax rate (mtr) plus the amount going abroad – the marginal propensity to import (mpm).

Download here  Karnataka Class 12 Commerce Economics Multiplier Complete Notes

Karnataka Class 12 Commerce Economics Chapter 10 Consumption And Investment Function Complete Details

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