1 alphabet soup and economics j.a.sacco. 2 real consumption and saving schedules: a hypothetical...
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1
Alphabet Soup and Economics
J.A.SACCO
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Real Consumption and Saving Schedules: A Hypothetical Case
(1) (2) (3) (4) (5) (6) (7)Planned Average Average
Real Planned Real Saving Propensity Propensity Marginal MarginalDisposal Real Con- Per Year to Consume to Save Propensity Propensity
Income per sumption (S=Yd-C) (APC=C/Yd) (APS=S/Yd) to Consume to SaveCombination Year (Yd) per year (C) (1) - (2) (2)/(1) (3)/(1) )dYC/(MPC )dYS/(MPS
A
$0B
2,000C
4,000D
6,000E
8,000F
10,000G
12,000H
14,000I
16,000J
18,000K
20,000
$2,000 3,6005,2006,8008,40010,00011,60013,20014,80016,40018,000
$-2,000-1,600-1,200
-800-400
0400800
1,2001,6002,000
----1.81.31.1331.051.0
.967
.943
.925
.911
.9
-----.8-.30.133-.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.
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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
income disposable real
nconsumptioAPC
Or
C/Yd
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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
income disposable real
savingAPS Or
S/Yd
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1 APS APC
Determinants of Planned Consumption and Planned Saving
Since the proportion of income spent and saved
must equal 100% of disposable income, then the
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For Example:
Real Disposable Income (RDI)=$6000
Consumption (C)=$5800, Saving(S)=200
Determinants of Planned Consumption and Planned Saving
APC=C/RDI=$5800/$6000=0.967
APS=S/RDI=$200/$6000=0.033
APC+APS=0.967(APC)+0.033(APS)=1.00ALWAYS Equals 1.00!
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Determinants of Planned Consumption and Planned Saving
ExampleIncome = $18,000
C = $16,400
S = $1,600
911.$18,000
$16,400 APC
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Determinants of Planned Consumption and Planned Saving
ExampleIncome increases $2,000 to $20,000
C = $18,000
S = $2,000
90.$20,000
$18,000 APC
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Determinants of Planned Consumption and Planned Saving
QuestionWhat is your APC and APS?
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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.
income disposable real in change
nconsumptio in changeMPC
Or ΔC/ΔRDI
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income disposable real in change
saving in changeMPS
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.
Or ΔS/ΔRDI
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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.
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Determinants of Planned Consumption and Planned Saving
Income1 = $18,000 Income1 = $20,000C1 = 16,400 C2 = 18,000S1 = 1,600 S2 = 2,000
Example
911.18,000
16,400 APC1
80.2,000
1,600 MPC
90.20,000
18,000 APC2
1) APC? 2) APS?3) APC? 4) APS? 5) MPC?
6) MPS?
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Determinants of Planned Consumption and Planned Saving
Then if:
80.$2,000
$1,600 MPC
.20 MPC - 1 MPS
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Quick Quiz
The proportion of any additional income that is consumed is the _______ propensity to ________.
The proportion of total disposable income that is saved is the _______ propensity to _____.
marginalconsume
averagesave