1 alphabet soup and economics j.a.sacco. 2 real consumption and saving schedules: a hypothetical...

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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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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


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


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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ExampleIncome = $18,000

C = $16,400

S = $1,600

911.$18,000

$16,400 APC

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ExampleIncome increases $2,000 to $20,000

C = $18,000

S = $2,000

90.$20,000

$18,000 APC

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QuestionWhat is your APC and APS?

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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


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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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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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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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

1 alphabet soup and economics j.a.sacco. 2 real consumption and saving schedules: a hypothetical...

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