Consumption and Saving

Consumption and Saving

2-23-17

Disposable Income (DI) - income after taxes or net income

• DI= gross income - taxes

With DI Households can either

1. Consume
2. Save

Consumption:

• Household spending
• Ability to consume is constrained by:
• Amount of DI
• Propensity to save
• Households consume if DI = 0, because of credit cards and checks (autonomous consumption). This is Dissaving.
• APC (average propensity to save) = C/DI (% DI that is spent)

Savings:

• Household not spending
• Saving is constrained by:
• Amount of DI
• Propensity to consume
• Households do not save when DI = 0
• APS (average propensity to save) = S/DI (% DI not spent)

Formulas

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC

APC > 1 = Dis-saving

-APS = Dis-saving

MPC and MPS

• Marginal propensity to consume
• Change in C / change in DI
• % of every extra dollar earned that is spent

• Marginal propensity to save
• Change in S / Change in DI
• % of every extra dollar earned that is saved

**DI = disposable income, C = consumption**

Formulas

• MPC + MPS = 1
• 1 - MPC = MPS
• 1 - MPS = MPC

Determinants of consumption and savings

• Wealth
• Expectations
• Household Debt
• Taxes