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UNIT 3: Consumption and Savings

Disposable Income (DI)
*Income after taxes or net income
DI = Gross income - Taxes
2 Options
*w/ DI, households can either
-consume (spending money on goods & services)
-save (not spend money on goods & services)
 
Consumption
*household spending
*The ability to consume is constrained by
-amount of DI
-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 DI
-prosperity to consume
*Households can NOT save if DI=0
APS = S/DI = % DI that is not spent

APC & APS
*APC + APS = 1
*1- APC = APS
*APC >1.:Dissaving
*-APS .: Dissaving

MPC & MPS
*Marginal Propensity to Consume (MPC)
--The fraction of any change in DI that is consumed.
ΔC/ΔDI
-% of every extra dollar earned that is spent
*Marginal Propensity to Save (MPS)
--The fraction of any change in DI that is saved
ΔS/ΔDI
-% of every extra dollar earned that is saved
 
 MPC + MPS =1
 MPC = 1-MPS
 MPS= 1-MPC
 
Determinants of C and S
Wealth
–Increased wealth .: Inc. C & Dec. S
–Decreased wealth .: Dec. C & Inc. S
Expectations
–Positive .: Inc C & Dec S
–Negative .: Dec C & Inc S
Household Debt
–High Debt .: Dec C & Inc S
–Low Debt .: Inc C & Dec S
Taxes
–Taxes Inc .: Dec C & Dec S
–Taxes Dec .: Inc C & Inc S

 

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