Unit 3: Consumption and Savings

March 23, 2018

Consumption and Savings

Disposable Income (DI)

• Income after taxes or net income

DI (disposable income) = Gross Income - Taxes

• 2 choices
• With disposable income, households can either:
1. Consume: spend money on goods and services
• Consumption
• Household Spending
• The ability of disposable income: The amount of disposable income and the prosperity to save
• Do households consume if DI = 0?
• Autonomous consumption and dissaving
2. Save: save money on goods and services
• Saving
• Household not spending
• The ability to save its constrained by: The amount of disposable income and the propensity to consume
• Do households save if DI = 0?
• No

APC and APS

• APC: Average propensity to consume
• APS: Average propensity to save

Average Propensity to consume (APC) + Average Propensity to save (APS) = 1

Average Propensity to consume (APC) > Dissaving

- Average Propensity to save (APS) = Dissaving

MPC and MPS

• Marginal Propensity to consume (MPC): fraction of any change in disposable income that is consumed.
• % of every extra dollar earned that is spent
• Marginal Propensity to save (MPS):  fraction of any change in disposable income that is saved.

Marginal Propensity to consume (MPC) + Marginal Propensity to save (MPS) = 1

Marginal Propensity to consume (MPC) = (Change in Consumption)/(Change is disposable income)

Marginal Propensity to save (MPS) = (Change in savings)/(Change in disposable income)