Unit 3 - Consumption & Saving

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 ability to consume is constrained 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 & APS (Average Propensity to Consume/Save)

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APS > 1 ∴ dissaving
• - APS ∴ dissaving

MPC & MPS

• Marginal Propensity to Consume
• the fraction of any change in disposable income that is consumed
• MPC = change in consumption / change in disposable income
• MPC = (Δ C) / (Δ DI)
• % of every extra dollar earned that is spent
• Marginal Propensity to Save
• the function of change is disposable income that is saved
• MPS = change in savings / change in disposable income
• MPS = (Δ S) / (Δ DI)
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1 - MPC = MPS
• 1 - MPS = MPC