Module 16B-Alphabet Soup and Economics J.A.SACCO

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 Marginal Disposal 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 Save Combination Year (Yd) per year (C) (1) - (2) (2)/(1) (3)/(1) A $0 B 2,000 C 4,000 D 6,000 E 8,000 F 10,000 G 12,000 H 14,000 I 16,000 J 18,000 K 20,000 $2,000 3,600 5,200 6,800 8,400 10,000 11,600 13,200 14,800 16,400 18,000 $-2,000 -1,600 -1,200 -800 -400 400 800 1,200 1,600 2,000 ---- 1.8 1.3 1.133 1.05 1.0 .967 .943 .925 .911 .9 ---- -.8 -.3 0.133 -.05 .0 .033 .057 .075 .089 .1 ---- .8 ---- .2 Looked at the basics of the Consumption function, now lets look at how a change in disposable income affects consumption and saving habits.

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 Or C/Yd

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 Or S/Yd

Determinants of Planned Consumption and Planned Saving Since the proportion of income spent and saved must equal 100% of disposable income, then the

APC+APS=0.967(APC)+0.033(APS)=1.00ALWAYS Equals 1.00! Determinants of Planned Consumption and Planned Saving 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!

Determinants of Planned Consumption and Planned Saving Example Income = $18,000 C = $16,400 S = $1,600

Determinants of Planned Consumption and Planned Saving Example Income increases $2,000 to $20,000 C = $18,000 S = $2,000

Determinants of Planned Consumption and Planned Saving Question What is your APC and APS?

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. Or ΔC/ΔRDI

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

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.

Determinants of Planned Consumption and Planned Saving Example Income1 = $18,000 Income1 = $20,000 C1 = 16,400 C2 = 18,000 S1 = 1,600 S2 = 2,000 3) APC? 4) APS? 5) MPC? 6) MPS? 1) APC? 2) APS?

Determinants of Planned Consumption and Planned Saving Then if:

Khan Academy- MPC and the Multiplier 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 _____. marginal consume average save Khan Academy- MPC and the Multiplier