Unit 3: Consumption and Saving

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 Disposable Income: income after taxes or net income

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 constrained by (the amount of disposable income, the propensity to save) 
  • Do households consume of DI = 0? Yes. (autonomous consumption, dissaving)
Saving
  • Household is not spending
  • The ability to save is constrained by (the amount of disposable income, the propensity to consume)
  • Do households save DI = 0? No. 
Formulas: 

APC = Average Propensity to Consume, APS = Average Propensity to Save
MPC = Marginal Propensity to Consume
APC + APS = 1
1 - APC = APS
1 - APS = APC
APC > 1 = Dissaving
-APS = Dissaving

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

MPC = change in consumption/change in DI (% of every extra dollar earned that is spent)

  • the fraction of any change in disposable income that is consumed
MPS = change in savings/change in DI

  • the fraction of any change in disposable income that is saved 

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