Consumption and Savings

February 25, 2016
Disposable income (DI)

• income after taxes or net income
• DI = gross income-taxes

(spender save)

2 choices 

• with disposable income, households can either

-consume (spend money on goods and devices)
-save ( not spend money on goods and services)


Consumption

• Household spending
• ability to consume is constrained by

-The amount of disposable income
-propensity to save

• Do households consume if DI= 0

-automatics consumptions

Savings

• household NOT spending
• ability to save is constrained by

-the amount of disposable income
-propensity to consume

• Do households save if DI= 0 no.

APS & APC

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

(MPC) Marginal propensity to consume

• fraction of any change in disposable income that is consumed
• mpc= change in consumption/ change in disposable income

Marginal propensities

• MPC+ MPS= 1
• MPC = 1-MPS
• MPS= 1-MPC
• EITHER SPEND OR SAVE