Course Title: Macroeconomics

Course Code: ECO201

DR.MUHMMAD IMTAIZ SUBHANI
 LECTURE NO:1 &2

MACRO ECONOMICS
MACRO : Study Of Large Unit Eg:(country) STUDY OF WHOLE

MICRO: Study Of Single Unit Or Firm Eg:(department)

1 SECTOR OF ECONOMY
2 SECTOR OF ECONOMY
3 SECTOR OF ECONOMY

1st Property CONSUMPTION AND CONSUMPTION FUNCTION

 LECTURE NO:1 &2

CONSUMPTION AND CONSUMPTION

FUNCTION:
Consumption and consumption function
Household expense – consumption

y = C + S
| | |
Income household saving
expense\spending

Y=income
C=consumption
S=saving
 LECTURE NO:1 &2
CONSUMPTION & CONSUMPTION FUNCTION:

Y= C + S
Y - S = C
C = Y -S

This equation is used to calculate the net consumption

C = Y - S equation
C = + cY equation
where,
C = Net Consumption
C = Autonomous Consumption
cY= Induced Consumption
c = Slope of consumption function
y = income
 LECTURE NO:1 &2

CONSUMPTION & CONSUMPTION

FUNCTION:
Autonomous Consumption:
‘’any coefficient which is remain constant is called Autonomous”.

INTERCEPT:
Y = + bx
where,
y=Dependent variable
a= Intercept
b= slope
x= independent
 LECTURE NO: 03

CONSUMPTION & CONSUMPTION

FUNCTION:
Dependent variable DV= Intercept + Slope ( independent variable)
DV = Intercept + Slope ( Independent variable)
DV = Intercept + Slope(0)
DV = Intercept

Dependent variable = Intercept

 LECTURE NO: 03

CONSUMPTION & CONSUMPTION FUNCTION:

y⬆ ➡ cY ⬆ ➡ C ⬆
y⬇ ➡ cY ⬇ ➡ C ⬇
 LECTURE NO: 03

CONSUMPTION & CONSUMPTION

FUNCTION:
C = Y – S ________1
C = + cY ________2
Y = + bx ________3

C =
C = + cY
Where Y=0
C = + c(0)
C = +0

C =
 LECTURE NO: 03

SLOPE:( c )
Slope = c
Slope =

c=
 LECTURE NO: 04

CONSUMPTION & CONSUMPTION

FUNCTION:
• y⬆ ➡ cY ⬆ ➡ C ⬆
y⬇ ➡ cY ⬇ ➡ C ⬇

C = + cY
Multiplying B.H.S By Δ
ΔC = ΔΔcY
ΔC = cΔY
 LECTURE NO: 05

SLOPE OF CONSUMPTION FUNCTION\

MARGINAL PROPENSITY TO CONSUME(MPC):
Slope of CF OR MPC =

MARGINAL = Least
PROPENSITY= responsive
CONSUME= consumption
DERIVATION OF SLOPE OF CF\MPC:
C = + cY
y⬆ ➡ cY ⬆ ➡ C ⬆
y⬇ ➡ cY ⬇ ➡ C ⬇
 LECTURE NO: 05

DERIVATION OF SLOPE OF CF\MPC:

Taking the consumption function

C = + cY
Multiplying the Δ on B.H.S
ΔC = Δ ( + cY)
ΔC = Δ + ΔcY
ΔC = 0 + ΔcY
ΔC = CΔY
=c
Slope ( c ) =
 LECTURE NO: 05
AVERAGE PROPENSITY TO CONSUME(APC):

Average = mean
Propensity = responsive
consume = consumption

apc =

DERIVATION OF SLOPE OF APC:

Taking the consumption function

C = + cY
Dividing the B.H.S BY ‘y’

apc =
 LECTURE NO: 05

RELATIONSHIP BETWEEN MPC & APC:

apc >mpc

>

PROOF:

C = + cY
Dividing B.H.S by ‘y’

= +

= +c

apc = + mpc

apc >
FINAL TERM :
SAVING $ SAVING FUNCTION:
Y=C+S
Y–C=S
OR
S=Y–C 1

• This equation is used to calculate net savings and is called saving

function.
• The difference of income and consumption is called savings.
SAVING AND SAVING FUNCTION:
DERIVATION:
S=Y-C 1
As we know that
C = + cY 2
Put in Equation 1
S= Y – ( + cY )
S = Y – - cY
S = -+ Y – cY
S = - + Y ( 1 – c)
Or ,
3
S= - + ( 1 – c)y
SAVING $ SAVING FUNCTION:
S = -+ (1 – c ) Y 1

Where,
S = Net saving
-= Autonomous dissaving
Y ( 1 – c ) = Induced saving
1- c = slope of saving function
Y = Income
 SLOPE OF SAVING FUNCTION:(1 – C)
Slope of saving function =
“The ratio of change in saving due to the change in income is called
slope of saving function.”
1–c=
DERIVATION:
Taking the saving function
S = - + ( 1 – c) Y
Multiplying B.H.S by ∆
∆S = ∆ ( - + ( 1 – c) Y)
∆S = - ∆+ ∆ (1- c) Y
∆S = 0 + (1 – c) ∆Y
= ( 1 – c)
Slope of saving function =
AUTONOMOUS DISSAVING:(-
S = -C
DERIVATION:
S = -+ (1-c) Y
Suppose ( Y= 0)
Put in above Equation
S = -+ (1 -c) (0)
S = -+ 0
S=-
Hence proved!
2 SECTOR OF ECONOMY:
 2 SECTOR OF ECONOMY:
2-sector = 1-sector + business sector
2-sector = household sector + business sector

BUSINESS SECTOR:
“The sector of economy in which we discuss about investors.”
Income: Y = C + I
Where, Y = Income,
C = Consumption,
I = Investment,
INVESTMENT AND INVESTMENT FUNCTION:
INVESTMENT AND INVESTMENT FUNCTION:

Y=C+I
H.H.SECTOR
Y=C+S
Where,
Y= Income
C= Consumption
S= Saving
AGGREATE DEMAND OF 2 SECTOR(AD2):
MATHEMATICAL DERIVATION:
2-SECTOR = H.H SECTOR + BUSINESS SECTOR

1
AD₂ = C +
AD₂ = C + I
As we know that
C = + cY
Put in eq 1
AD₂ = + cY+
AD₂ = + + cY
Hence Proved!
AGGREATE DEMAND OF 2 SECTOR(AD2):
At y = 0
AD₁ = C =
=I=
AD₂ = +
AD₂ = 0 +
At y = yₒ₁
AD₁ = C = Eₒ₁Yₒ₁
= = Eₒ₁ A
AD ₂= C+
AD ₂= Eₒ₁ Yₒ₁ + Eₒ₁ A
AD ₂= Yₒ₁ A
AGGREATE DEMAND OF 2 SECTOR(AD2):
At = y = Yₒ₂
AD₁= C = Yₒ₂ B
I = B Eₒ₂
AD ₂ = C +
AD₂ = Yₒ₂ B + B Eₒ₂
AD₂ = Yₒ₂ Eₒ₂
3 SECTOR OF ECONOMY
3 – SECTOR OF ECONOMY
3-sector = H.H sector + Business sector + Gov. sector

AD₃ = C + I + G
Where, C= + cY
I=
G=
put in above eq 1
AD₃ = + cy + +
AD₃ = + + + cY
GOVERNMENT EXPENDITURE
GRAPHICAL REPRESENTATION OF
AGGREGATE DEMAND OF 3 - SECTOR