advertisement

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