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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Page 1: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

1

Alphabet Soup and Economics

J.A.SACCO

Page 2: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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.

Page 3: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 4: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 5: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 6: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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!

Page 7: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 8: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 9: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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Determinants of Planned Consumption and Planned Saving

QuestionWhat is your APC and APS?

Page 10: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 11: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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

Page 12: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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.

Page 13: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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?

Page 14: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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Determinants of Planned Consumption and Planned Saving

Then if:

80.$2,000

$1,600 MPC

.20 MPC - 1 MPS

Page 15: 1 Alphabet Soup and Economics J.A.SACCO. 2 Real Consumption and Saving Schedules: A Hypothetical Case (1)(2)(3)(4)(5)(6)(7) PlannedAverageAverage RealPlannedReal

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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