Consumption and Savings -

Consumption and Savings - 

Disposable Income (DI)

• Income after taxes or net income
• DI = Gross Income - Taxes

• With disposable income, households can either
• Consume (spend money on goods and services)
• 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 = 0
• Autonomous consumption
• Dissaving

Savings

• Household NOT spending
• The ability to save is constrained by
• The amount of disposable income
• The propensity to consume
• Do households save if DI = 0?
• No

APC (Average Propensity to Consume) & APS (Average Propensity to Save)

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 .: Dissaving
• -APS, .: Dissaving

MPC & MPS

• Marginal Propensity to Consume
• Change in Consumption / Change in Disposable Income
• $ of every extra dollar earned that is spent
• Marginal Propensity to Save
• Change in Saving / Change in Disposable Income
• % of every dollar earned that is saved
• MPC + MPS = 1
• 1- MPC = MPS
• 1 - MPS = MPC

Marginal Propensity to Consume (MPC)

• The fraction of any change in disposable income that is consumed
• MPC = change in consumption (C) / change in disposable income (DI)

Marginal Propensity to Save (MPS)

• The fraction of any changes in disposable income that is saved
• MPS = change in savings (S) / change in disposable income (DI)