February 23, 2017

Consumption and Saving

Disposable Income: 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 controlled by:
•  The amount of disposable income
• The propensity to save
• Do households consume if DI=0?
• Autonomous Consumption
• Dissaving

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

APC and APS

APC= Average Propensity to Consume

APS= Average Propensity to Save

APC + APS = 1

1 - APC = APS

1 - APS = APC

-APS = Dissaving

APC > 1 = Dissaving

MPS and MPS

MPC= Marginal Propensity to Consume

Change in C / Change in DI

• % every extra dollar earned that is spent

MPS= Marginal Propensity to Save

Change in S / Change in DI

• % of every extra dollar earned is saved

MPC + MPS = 1

1 - MPC = MPS

1 - MPS = MPC

Determinants of Consumption and Saving

• Wealth
• Expectations
• Household Debt
• Taxes