Class 12 Macro Economics Notes · CBSE
Saving-Investment Approach
Saving-Investment Approach — understand how equilibrium is reached through the equality of saving and investment with real-life examples. CBSE Class 12 Macroeconomics notes.
Last updated: 16 Aug 2026
Notes
S-I Equilibrium Condition
Equilibrium Condition
Saving-Investment Equality
The equilibrium level of income is determined where planned saving equals planned investment.
Key features of the S-I diagram
- Investment curve (I) is parallel to the X-axis (autonomous investment)
- Saving curve (S) slopes upward (saving rises with income)
- Equilibrium at intersection point E
S-I Equilibrium Schedule
| Income (Y) | Consumption (C) | Saving (S) | Investment (I) | Remarks |
|---|---|---|---|---|
| 0 | 40 | -40 | 40 | S < I |
| 100 | 120 | -20 | 40 | S < I |
| 200 | 200 | 0 | 40 | S < I |
| 300 | 280 | 20 | 40 | S < I |
| 400 | 360 | 40 | 40 | Equilibrium (S=I) |
| 500 | 440 | 60 | 40 | S > I |
| 600 | 520 | 80 | 40 | S > I |
Diagrammatic Representation
Saving-Investment Equilibrium
I = 40
S
Key points
- E is the equilibrium point where S and I curves intersect
- At E: ex-ante saving = ex-ante investment
- OY is the equilibrium output level
- Equilibrium income = 400 crores where S = I = 40 crores
Adjustment Mechanisms
The economy adjusts toward equilibrium through inventory changes. Here are both adjustment directions:
When S > I (after equilibrium)
Households consume less and save more than firms expected
Unsold inventory rises above desired level
Firms reduce production → lower income until S = I
When S < I (before equilibrium)
Households consume more and save less than firms expected
Planned inventory falls below desired level
Firms increase production → higher income until S = I
Both adjustment mechanisms work simultaneously across different sectors of the economy, always pushing toward the point where S = I.