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Consumption and Savings

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39 views32 pages

Consumption and Savings

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rosellasenense
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© © All Rights Reserved
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MACROECONOMICS

CONSUMPTION AND
SAVING

PRESENTER: MA. ROSELLA KATRINA A. SENENSE


2ND YEAR BSE SOCIAL STUDIES
DEFINITION OF TERMS
CONSUMPTION

• The final purchase of goods and


services by individuals.
SAVINGS
• Saving equals investment. By
definition, saving is income minus
spending.
INCOME
•Money or value that an individual or
business entity receives in exchange for
providing a good or service or through
investing capital.
CONSUMPTION FUNCTION
• Economic formula that measures the
relationship between income and total
consumption of goods and services in the
economy.
AUTONOMOUS CONSUMPTION
• The expenditures that consumers must
make even when they have no disposable
income. These expenses cannot be
eliminated, regardless of limited
personal income, and are deemed
autonomous or independent as a result.
Keynes’s Psychological Law of
Consumption:
• Keynes propounded the fundamental Psychological Law of
Consumption which forms the basis of the consumption
function. He stated that “The fundamental psychological law
upon which we are entitled to depend with great confidence
both prior from our knowledge of human nature and from the
detailed facts of experience, is that men are disposed as a rule
and on the average to increase their consumption as their
income increases but not by as much as the increase in their
income.” The law implies that there is a tendency on the part
of the people to spend on consumption less than the full
increment of income.
ENGEL’S LAW
• States that as a household's (or a nation's) income
rises, the percentage of income spent on food
decreases and the percentage spent on other goods and
services increases. Developed in the mid-19th century
by the German statistician Ernst Engel, it remains
influential in economics and public policy today.
EXAMPLE OF ENGEL’S LAW
• Suppose a family with an annual household income of
$50,000 spends 25% of their income on food, or
$12,500. If their income doubles to $100,000, it is
unlikely that they will spend $25,000 (25%) on food,
although they may spend somewhat more than they
had been spending.
TIME TO SOLVE!
What is the consumption function
formula?
•The consumption function formula is
C=c+bY. C is the total consumption, c is
the basic consumption, b is the marginal
propensity to spend, and Y is the income.
• C = Consumption
• Y = Income
• f = Function

• Consumption function is a schedule of the various


amounts of consumption expenditure corresponding to
different levels of income.
•It shows that consumption is an
increasing function of income
because consumption expenditure
increases with increase in income.
When income is zero, people spend
out of their past savings on
consumption because they must eat
in order to live (Autonomous
Consumption).
• Here, when y = 120, C = 120 (Point B is the diagram)

• When y = 180, C = 170, S = 10 (Point S is the


diagram)

• If Y increases to 360, C = 320, S = 40


• In the diagram, income is measured
horizontally and consumption is measured
vertically. In 45 line at all levels, income and
consumption are equal. It is a linear
consumption function based on the
assumption that consumption changes by the
same amount as does income.
• Thus the consumption function measures not
only the amount spent on consumption but also
the amount saved. This is because the propensity
to save is merely the propensity not to consume.
The 45° line may therefore be regarded as a zero-
saving line, and the shape and position of the C
curve indicate the division of income between
consumption and saving.
Technical Attributes of the Consumption
Function
(1) The Average Propensity to
Consume:
• The average propensity to consume is the ratio of
consumption expenditure to any particular level
of income.” Algebraically it may be expressed as
under:
APC = C/Y
C= Consumption
Y = Income

Then devide.
(2) The Marginal Propensity to Consume:
• The marginal propensity to consume may be defined
as the ratio of the change in the consumption to the
change in income. Algebraically it may be expressed
as under:
MPC = ∆C/∆Y
ΔC= Change in Consumption
ΔY = Change in Income
MPC is positive but less than
unity
0 < ∆C/∆Y < 1
(3) The Average Propensity to Save (APS) :
• The average propensity to save is the ratio of saving to
income. APS is the quotient obtained by dividing the total
saving by the total income. In other words, it is the ratio of
total savings to total income. It can be expressed
algebraically in the form of equation as under:

Where
S= Saving
Y=Income
(4) The Marginal Propensity to Save (MPS) :
• Marginal Propensity to Save is the ratio of change in
saving to a change in income.
• MPS is obtained by dividing change in savings by
change in income. It can be expressed algebraically as:
MPS = ∆S/∆Y

ΔS = Change in Saving

ΔY= Change in Income


• Since MPC+MPS=1
• MPS=1-MPC and MPC = 1 - MPS
• Generally the average ie APC is expressed in
percentage and the MPC in fraction.
THANK YOU FOR LISTENING!

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