25 February 2016 [Consumption and Saving (Unit 3)]

Consumption and Savings

Disposable Income: Income after taxes or net income

DI = Gross Income - Taxes

2 choices

•  With disposable income, household
• Consume (Spending money on goods and service
• Save (not spend money on goods and services

Consumption: Household spending the ability to consume is constrained by the amount of disposable income the propensity to save.

• Do households consume if DI = O
• Autonomous consumption
• Dissaving

APC = C/ DI = DI that is Spent saving

Saving: House hold NOT spending the ability to save is constrained by the amount of disposable income the propensity to consume.

Do house holds save if DI = O

NO

APS = S/DI=%DI that is not spent

APC and APS

APC+APS=1

1-APC = APS

1-APS =APC

APC > 1.: dis-saving

-APS.: Dis-saving

MPS and MPC

• Marginal Propensity to consume 

- change in C/ change in DI

-% of every extra dollar earned that is spend

• Marginal Propensity to save

- change in S/ change in DI

-% of every extra dollar earned that is save 

- MPC + MPS = 1

-1-MPC=MPS

-1-MPS=MPC