Consumption and Saving (2/23/17)

• Disposable Income (DI)

- Income after taxes or net income

- DI = Gross Income - Taxes

2 Choices

• With disposable income, households can either:

- Consume (spend money on goods & services)

- Save (not spend money on goods & services)

Consumption

• Household spending
• The amount to consume is constrained by:

- The amount of disposable income

- The propensity to save

• Do households consume if DI = 0

- Autonomous consumption

- Dissaving

• APC = C / DI = % DI that is spent

Saving

• 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

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

APC & APS

• ·         APC + APS = 1
• ·         1  –  APS = APS
• ·         1  – APS = APC
• ·         APC > 1 .: Dissaving
• ·          - APS.: Dissaving

MPC & MPS

• ·         Marginal Propensity to Consume

- ∆C / ∆DI

- % of every extra dollar earned that is spent

• ·         Marginal Propensity to Save

- ∆S / ∆DI

- % of every extra dollar earned that is saved

• ·         MPC + MPS = 1
• ·         1 – MPC = MPS
• ·         1 – MPS = MPC

Determinants of C & S 

• Wealth
• Expectation
• Household Debt
• Taxes

      Practice at:
    http://teachersites.schoolworld.com/webpages/KKrejnik/files/day%2020%20practice%20problems%20multiplier%20effect.pdf