02/24/14 Consumption and Saving

• Disposable Income (DI)
• Income after taxes or net income
• DI= Gross Income- Taxes
• With disposable income, households can either:
• Consume (Spend money on goods and services)
• Save ( Not spend money on goods and services)
• Consumption
• Household spending
• The ability to consume is constrained by:
• The amount of disposable income.
• The propensity to save.
• Do households consume if DI=0?
• Autonomous consumption
• Dissaving
• APC= C/DI= % DI that is spent
• Saving
• Households NOT spending
• The ability to save is constrained by
• The amount of disposable income
• The propensity to consume
• Do households save if DI=0? NO
• APS= S/DI= % DI that is not spent
• APC= Average Propensity to Consume
• APS= Average Propensity to Save
• APC & APS
• APC+APS=1
• 1-APC=APS
• 1-APS=APC
• APC>1--> Dissaving
• -APC<1--> Dissaving
• MPC & MPS
• Marginal propensity to consume

• % of every extra dollar earned that is spent.
• Marginal propensity to save

• % of every extra dollar earned that is saved.
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC
• Determinants of C& S
• Wealth
• Expectations
• Households debt
• Taxes