3.6: The “Break-Even” Point

The macroeconomic consumption function illustrates the relationship between aggregate consumption (C) and national income (Y). It is typically expressed as:

C = a + bY

where a denotes autonomous consumption—expenditures that occur regardless of income—and b, the marginal propensity to consume (MPC), indicates the fraction of additional income that is spent.

The break-even point occurs where:

C = Y

Solving for income yields the break-even level of national income:

At this level, the entire output (income) produced by the economy is consumed. There is no net saving at this point, and hence, the economy operates at a state of zero aggregate saving.

Graphical Representation in Macroeconomics

This concept is commonly depicted in the Keynesian Cross diagram. A 45-degree line from the origin represents all points where output equals aggregate expenditure. The consumption function intersects this line at the break-even level of income. To the left of this intersection, aggregate consumption exceeds income, suggesting an unsustainable situation where the economy would rely on past savings or debt accumulation. To the right, income exceeds consumption, and the excess constitutes national saving.

Macroeconomic Significance

Understanding the break-even point has important implications for fiscal policy and economic planning. It helps economists determine the threshold at which consumer behavior shifts from dissaving to saving. Moreover, policymakers can use this point to forecast the effects of changes in taxation, transfers, or interest rates on aggregate demand. In recessionary conditions, increasing national income beyond the break-even point is essential to stimulate saving and investment, thereby promoting long-term growth and stability.

The break-even point is when an individual’s total consumption matches their total disposable income. At this precise point, every dollar earned is spent—nothing is saved or borrowed.

Let’s consider Kevin. He earns a disposable income of $2,000 each month. If he spends exactly $2,000 on his monthly expenses, he’s operating at the break-even point. There’s no surplus to save, and no shortfall that requires borrowing.

This concept can be visualized on a graph that includes the consumption function. A 45-degree line drawn from the origin is a useful reference for comparing disposable income and consumption. This line represents all points where disposable income equals consumption. The break-even point appears where the consumption function intersects this 45-degree line.

Below the break-even point, consumption exceeds disposable income. This means Kevin is either borrowing money or using savings he accumulated in the past.

Above the break-even point, consumption is less than the disposable income. In this case, Kevin has surplus funds that he can save.

Precisely at the break-even point, there is neither borrowing nor saving.