AS INCOME RISES,
CONSUMPTION RISES, BUT NOT
AS QUICKLY
AVERAGE PROPENSITY TO CONSUME
PERCENTAGE OF
DI SPENT
PERCENTAGE OF
DI SAVED
DISPOSABLE INCOME
SAVING
80, 000
5,000
APC?
• 0.9375
• 93.75% IS SPENT TO SERVICES & GOODS
APS?
• 0.0625
• 6.25% OF HIS INCOME GOES TO HIS SAVINGS
• APC + APS = 1
• IS IT POSSIBLE TO HAVE AN APC GREATER
THAN 1?
DISPOSABLE INCOME
CONSUMPTION
25,000
29,000
• WHAT DOES 1 SUGGEST?
– YOU SPEND BEYOND YOUR MEANS. YOU SPEND
MORE THAN YOUR INCOME
– NO SAVINGS!
YEAR
DISPOSABLE INCOME
CONSUMPTION
2013
18,000
10,000
2014
21, 000
14, 000
AS INCOME RISES, CONSUMPTION RISES (BUT
BY LESS THAN DOES INCOME)C
MPC?
4,000 / 3,000 = 1.33
YEAR
DISPOSABLE INCOME
CONSUMPTION
2013
18,000
10,000
2014
21, 000
14, 000
AS INCOME RISES, BOTH CONSUMPTION AND
SAVING WILL RISE
MPS?
SOLVE FOR SAVINGS FIRST:
8,000 -7,000 = 1,000
1,000/ 3,000 = .33
SIGNIFICANCE OF “C” CROSSING THE 45* LINE?
CONSUMPTION < DI
CONSUMPTION > DI
MPC? = DI IS FROM 6 TO 8
DI = FROM
6
8
C?
5.5
7
1.5/2 =
0.75
CONSUMPTION SCHEDULE
SAVING FUNCTION
INCOME BELOW 4? =
DISSAVING
DISSAVING = SAVING
BELOW 0
DI = C + S
FIND C & S IF DISPOSABLE
INCOME IS 2
DI – S = C
C= 2.5
DI – C = S
S= -.5
AUTONOMOUS
CONSUMPTION ?
LEVEL OF CONSUMPTION
WHEN DISPOSABLE
INCOME IS 0
PEOPLE WILL SPEND A
CERTAIN AMOUNT ON
THE NECESSITIES OF LIFE
EVEN WITHOUT INCOME
INDUCED
CONSUMPTION ?
INDUCED = INFLUENCE/
PERSUADE
CAN A DISPOSABLE INCOME OF 0 INDUCE
CONSUMPTION?
AS DISPOSABLE INCOME RISES, INDUCE
CONSUMPTION ALSO RISES
AS DISPOSABLE INCOME FALLS, INDUCE
CONSUMPTION ALSO FALLS
CONSUMPTION = AUTONOMOUS CONSUMPTION + INDUCED CONSUMPTION
C = AC + IC
C – AC = IC
C - IC = AC
AUTONOMOUS
CONSUMPTION ?
INDEPENDENT OF
DISPOSABLE INCOME
LEVEL OF CONSUMPTION
WHEN DISPOSABLE
INCOME IS 0
AUTONOMOUS
CONSUMPTION IS 40
INDUCED CONSUMPTION
C = AC + IC
IC? IF 360 IS C
IC = 320
3 CATEGORIES OF
CONSUMPTION
Things that last a
while – at least 3
years
THINGS THAT DON’T
LAST LONG
NONDURABLES
SERVICES
set of actions that are performed to
provide a set of outcomes for
consumer’s satisfaction
INTANGIBLE
DETERMINANTS OF THE LEVEL OF
CONSUMPTION
1) DISPOSABLE INCOME
2) CREDIT AVAILABILITY
3) STOCK OF LIQUID ASSETS IN THE HANDS OF
THE CONSUMERS
4) STOCK OF DURABLE GOODS IN THE HANDS
OF CONSUMERS
5) KEEPING UP WITH THE JONESES
6) CONSUMER EXPECTATIONS
Level of DI largely
determines the level
of C
AT VERY LOW INCOME
LEVELS, PEOPLE
ACTUALLY DISSAVE
PRICE OF CONSUMPTION
YOUR DAILY NEEDS DON’T
CHANGE
TO MEET YOUR DAILY NEEDS, YOU
BORROW CREDIT OR YOU’LL GO TO
YOUR SAVINGS
LENDER: (CREDO/
BELIEVES) LENDS
RESOURCES
ENTRUSTING: LATER
PAYMENTS
CREDIT AVAILABILITY: WHEN
CREDIT IS EASED, PEOPLE
TEND TO BORROW MORE
CREDIT AVAILABILITY VARIES
INVERSELY WITH THE LEVEL OF
CONSUMER DEBT.
DEBTOR: BORROWER
THE MORE YOU OWE, THE
LESS CREDIT AVAILABLE
STOCK OF LIQUID ASSETS IN THE HANDS OF
THE CONSUMERS
OWNED THINGS THAT
CAN BE QUICKLY
TURNED INTO CASH
33 million shares of facebook’s stock and the
price of the stock rises to 35?
1.15 billion richer
at least on paper
WOLF OF
WALLSTREET:
COMMISSION ON
EACH INVESTOR
THEY GET
Brokers will
encourage you to
invest your money
on other shares
SALES OF DURABLE GOODS VARY INVERSELY
WITH THE STOCK OF CONSUMER DURABLES
IN THE HANDS OF THE CONSUMERS
WHEN PEOPLE HOLD A LARGE STOCK OF
CONSUMER DURABLES, CONSUMER
DURABLE SALES TEND TO BE LOW
SIM CARD COSTS P 1,000
1999 = 3210 costs P10, 000
AFTER 15 YEARS = NOKIA
LUMIA COSTS P7, 900
WHEN PEOPLE HOLD A LARGE STOCK OF
CONSUMER DURABLES, CONSUMER
DURABLE SALES TEND TO BE LOW
AFTER 15 YEARS = MY
PHONE AGUA COSTS P2, 988
CONSPICUOUS
STANDING OUT SO AS TO BE
CLEARLY VISIBLE
KEEPING UP WITH THE
JONESES
IF WE DON’T BUY IT, WE
WON’T BE KEEPING UP
KEEPING UP WITH THE
JONESES
CONSUMER EXPECTATION
WHEN INFLATION IS EXPECTED,
PEOPLE BUY MORE
WHEN RECESSION IS EXPECTED,
PEOPLE BUY LESS
PERMANENT INCOME
HYPOTHESIS
ESTIMATING FUTURE
EARNINGS UNTIL ONE RETIRES
Income is greater than
consumption during the middle
ages (30-50)
PEOPLE GEAR THEIR CONSUMPTION
TO THEIR EXPECTED EARNINGS MORE
THAN TO THEIR CURRENT INCOME
496 X 2 = 992, 000
992, 000 – 496, 000 = 496, 000
(REMAINING BALANCE)
10, 522 X 60 MONTHS
631, 320 – 496, 000
135, 000 INTEREST
HOW CERTAIN ARE YOU THAT
YOU WILL NOT INCUR OTHER
ADDITIONAL/ EMERGENCY
EXPENSES WITHING THE NEXT
5 YEARS?