Consumption & Savings MPC & MPS.

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Presentation transcript:

Consumption & Savings MPC & MPS

Disposable Income (DI) Disposable Income (DI) = Gross Income – Net Taxes Disposable Income = income after paying taxes Gross income = income before taxes Net taxes = Taxes paid – Gov’t transfer payments received You have 2 choices with income: Consume or Save DI = Consumption + Savings

Consumption & Savings are functions of DI Consumption & Savings Function If DI ↑ C & S

Autonomous Consumption (a) Is the minimum amount of consumption regardless of income C = a + MPC(DI) S = -a + MPS(DI) At low levels of income, savings can be negative!

Marginal Propensity to Consume MPC = Slope of the consumption function MPC = ∆C / ∆ DI DI ↑ C ↑ Consumption Function . .

Marginal Propensity to Save (MPS) MPS = Slope of the saving function MPS = ∆S / ∆ DI If MPS = .40 DI ↑ $1,000 => Savings ↑ $400

everything not saved is consumed: MPC + MPS = 1 Must be true because everything not saved is consumed: DI = C + S MPC + MPS = 1 fraction income consumed fraction income saved So if DI ↑ $2,000 Savings => Consumption => MPC = .60 MPS = .40

Shifts in Consumption & Savings A change in disposable income cause movements along curve that means no shift! Shifts are caused by change in determinants of savings/consumption C & S generally must shift in opposite directions

Determinants of Consumption & Savings Changes in these 4-factors cause shift in both functions Wealth Expectations Household Debt Taxes & Transfers Only time each curve shifts in same direction

MPC/MPS Worksheet