elementary theory of income determination

elementary theory of income determination, At the end of this chapter, students should be able to:. Identify sectors in the national economy and explain the elementary theory of income determination, outputs and income among the sectors.

Draw simple diagrams illustrating the circular flow of income elementary theory of income determination

Explain the concepts of savings, investment and consumption and relationship among those concepts.

Explain simple concepts like the marginal propensity to consume and the marginal propensity to save and their relevance to the growth of national income.

Explain and illustrate the determination of equilibrium level of income.income equilibrium


Theory of elementary theory of income determination states that The total income of a country is a reflection of real capital investment in that particular country. Consolidation of the financial institutions

The volume of investments is determined mainly by certain factors. These factors include expectation of entrepreneurs, rate of interest, savings, marginal efficiency of capital, and consumption.

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elementary theory of income determination

  1. loans for businesses
  2. how to establish enterprises
  3. what is a firm
  4. price equilibrium
  5. scale of preference
  6. concept of economics
  7. economic tools for nation building
  8. budgeting
  9. factors affecting the expansion of industries
  10. mineral resources and the mining industries




  1. Fixed cost (FC):  fixed cost also called overhead cost or unavoidable cost is defined as the cost or expenses that remain unchanged whatever the level of output. It simply means the cost of an enterprise which does not change with change of output. In other words, fixed cost does not change with the changing output. Thus, fixed cost remains the same. Fixed cost can be represented by a graph as shown in Fig. 23.1. Examples of fixed cost are the cost of buildings, land, motor vehicles and plant and machinery. Fixed cost is calculated by this formula: FC = TC – VC OR TFC = AFC x Quantity produced
  2. Variable cost (VC): Variable cost, also called direct cost, is defined as the cost of production which varies or changes directly with the level of output. Variable cost has the tendency to rise as more of a commodity is produced and reduce as less of the commodity is produce. Variable cost can be represented by a graph as shown in Fig. 23.2. Examples of variable cost includes cost of fuel, raw materials, labour etc. Variable cost is calculated by thus formula: VC = TC – FC.
  3. Total cost (TC): Total cost may be defined as the total sum of fixed and variable costs incurred by an enterprise in the production  of a particular commodity. Total cost, presented in Fig. 23.3, is made up of two parts: total fixed cost (TFC) and total variable cost (TVC). Total cost can be calculated with this formula: TC = FC + VC or TC = ATC x Q
  4. Average cost (AC) or Average Total Cost (ATC): Average cost is defined as a cost per unit of output or the total cost or production of a commodity incurred by an enterprise divided by the number of units of output. Average total cost (ATC) is divided into average fixed costs (AFC) and average variable costs (AVC). Average cost (AC) is derived by dividing the total cost by the total number of output produced. Average cost, which is represented graphically in Fig. 23.4, is calculated by this formula: