Unit 3

2-23-17

Consumption and savings

Disposable income (DI)

• income after taxes/ net income
• DI= gross income - taxes
• 2 choices, disposable income, households can either
• consume (spend money on goods and services) 
• save(not spend money on goods and services)

Consumption

• household spending
• ability to consume is contained by
• amount of disposable income
• propensity to save
• Do households consume if DI = 0?
• autonomous consumption
• Dissavings
• APC = C/DI % DI that is spent

Savings

• Household not spending
• ability to save is constrained by
• amount of disposable income
• propensity to consume
• Do households save if DI = 0? - No
• APS = S/DI% DI that not spent

APC and APS

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 Dis-savings 
• -APS dis-savings

MPC and MPS

• Marginal Propensity to consume
• ΔC/Δ DI
• % of every extra dollar earned that is spent
• Marginal Propensity to save 
• ΔS/ΔDI
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1- MPC = MPS
• 1- MPS = MPC

Determinants of C and S

• Wealth
• Expectations
• Household debt
• Taxes