1. Consumption & Savings
MPC & MPS

2. 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

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

4. 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!

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

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

7. 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

8. 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

9. 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

10. MPC/MPS Worksheet