Consumption Savings MPC MPS Disposable Income DI Disposable

Consumption & Savings MPC & MPS

Disposable Income (DI) • Disposable Income (DI) = Gross Income – Net Taxes • Gross income = income before taxes • Net taxes = Taxes paid – Gov’t transfer payments received • Disposable Income = income after net taxes (also called net income) • You have 2 choices with disposable income: Consume or Save – DI = Consumption + Savings [S] $200 FIRMS Consumption [C] $800 DISPOSABLE INCOME ($) $1, 000 HOUSEHOLDS

Marginal Propensity Consume or Save (MPC & MPS) • MPC = % of DI consumed – MPC = ∆C / ∆ DI – Slope of the consumption function Consumption Function MPC = $300/$400 =. 75 C ↑ • MPS = % of DI saved – MPS = ∆S/ ∆ DI DI ↑ – Slope of the savings function • MPC + MPS = 1 – Every dollar not consumed is saved! – If MPC =. 75 => then MPS =. 25 If DI ↑ $400 => S ↑ $100

Consumption & Savings Function • Consumption & Savings are functions of DI – As DI ↑ => C ↑ + S ↑ • Autonomous consumption (a) – amount of consumption at ZERO disposable income (a) C = a + MPC(DI) (consumption function) S = -a + MPS(DI) (savings function) At low levels of income, savings can be negative!

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 • 4 -factors can shift both functions – – Wealth Expectations Household Debt Taxes & Transfers • Only time each curve shifts in same direction If C ↑ then S ↓

MPC/MPS Worksheet