# Module 16B- Alphabet Soup and Economics

```Alphabet Soup and
Economics
J.A.SACCO
1
Real Consumption and Saving Schedules: A
Hypothetical Case
(1)
(3)
Planned
Real
Planned Real Saving
Disposal Real ConPer Year
Income per sumption
(S=Yd-C)
Combination
Year (Yd) per year (C)
(1) - (2)
\$0
B
2,000
C
4,000
D
6,000
E
8,000
F 10,000
G 12,000
H 14,000
I 16,000
J 18,000
K 20,000
A
(2)
\$2,000
3,600
5,200
6,800
8,400
10,000
11,600
13,200
14,800
16,400
18,000
\$-2,000
-1,600
-1,200
-800
-400
0
400
800
1,200
1,600
2,000
(4)
Average
Propensity
to Consume
(APC=C/Yd)
(2)/(1)
---1.8
1.3
1.133
1.05
1.0
.967
.943
.925
.911
.9
(5)
(6)
(7)
Average
Propensity
Marginal
Marginal
to Save
Propensity
Propensity
(APS=S/Yd)
to Consume
to Save
(3)/(1)
(MPC  C/Yd ) (MPS  S/Yd )
----.8
-.3
0.-133
-.05
.0
.033
.057
.075
.089
.1
---.8
.8
.8
.8
.8
.8
.8
.8
.8
.8
---.2
.2
.2
.2
.2
.2
.2
.2
.2
.2
Looked at the basics of the Consumption function, now lets look at how a
change in disposable income affects consumption and saving habits.
2
Determinants of Planned Consumption and
Planned Saving
Average Propensity to Consume (APC)
Consumption divided by disposable income
The proportion of total disposable income that
is consumed
consumptio n
APC 
real disposable income
Or
C/Yd
3
Determinants of Planned Consumption
and Planned Saving
Average Propensity to Save (APS)
Saving divided by disposable income
The proportion of total disposable income that
is saved
saving
APS 
real disposable income
Or
S/Yd
4
Determinants of Planned Consumption
and Planned Saving
Since the proportion of income spent
and saved
must equal 100% of disposable income,
then the
APC  APS  1
5
Determinants of Planned Consumption and
Planned Saving
For Example:
Real Disposable Income (RDI)=\$6000
Consumption (C)=\$5800, Saving(S)=\$200
APC=C/RDI=\$5800/\$6000=0.967
APS=S/RDI=\$200/\$6000=0.033
APC+APS=0.967(APC)+0.033(APS)=1.00
ALWAYS Equals 1.00!
6
Determinants of Planned Consumption and
Planned Saving
Example
Income = \$18,000
C = \$16,400
S = \$1,600
\$16,400
APC 
 .911
\$18,000
7
Determinants of Planned Consumption and
Planned Saving
Example
Income increases \$2,000 to \$20,000
C = \$18,000
S = \$2,000
\$18,000
APC 
 .90
\$20,000
8
Determinants of Planned Consumption and
Planned Saving
Question
What is your APC and APS?
9
Determinants of Planned Consumption
and Planned Saving
Marginal Propensity to Consume (MPC).
The ratio of the change in consumption to the
change in disposable income.
Percentage of any additional disposable income
that is consumed.
change in consumptio n
MPC 
change in real disposable income
Or ΔC/ΔRDI
10
Determinants of Planned Consumption and
Planned Saving
Marginal Propensity to Save (MPS).
The ratio of the change in saving to the change
in disposable income.
The percentage of any additional income that is
saved.
change in saving
MPS 
change in real disposable income
Or ΔS/ΔRDI
11
Determinants of Planned Consumption
and Planned Saving
Since 100% of any change in disposable income must
be consumed or saved, then the MPC +MPS=1.
For Example- RDI increases by \$1000, consumption
increases by \$800, and saving increases by \$200.
MPC= Change in C/Change in Income=\$800/\$1000=0.8 or
80% of NEW income consumed.
MPS= Change in S/Change in Income=\$200/\$1000=0.2 or
20% of NEW income saved.
Therefore-MPC+MPS=0.8+ 0.2= 1.00.
ALWAYS EQUALS 1.
Note- MPC is constant slope of consumption function.
MPS is constant slope of saving function.
12
Determinants of Planned Consumption
and Planned Saving
Example
Income1 = \$18,000
C1 =
16,400
S1 =
1,600
1) APC? 2) APS?
16,400
APC1 
 .911
18,000
Income2 = \$20,000
C2 =
18,000
S2 =
2,000
3) APC? 4) APS? 5) MPC?
6) MPS?
18,000
APC2 
 .90
20,000
1,600
MPC 
 .80
2,000
13
Determinants of Planned Consumption and
Planned Saving
Then if:
\$1,600
MPC 
 .80
\$2,000
MPS  1- MPC  .20
14
Quick Quiz
The proportion of any additional income
that is consumed is themarginal
_______ propensity
consume
to ________.
The proportion of total disposable income
that is saved is the _______
average propensity to
save
_____.
15
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