Transcript Consumption & Savings: MPC/MPS

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
Savings [S]
FIRMS
Consumption [C]
HOUSEHOLDS
DISPOSABLE INCOME
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
Consumption Function
C ↑
DI ↑
.
.
Marginal Propensity to Save
(MPS)
• MPS = Slope of the saving function
MPS = ∆S / ∆ DI
If MPS = .40
DI ↑ $1,000 => Savings ↑ $400
MPC + MPS = 1
• MPC + MPS = 1
fraction income consumed
Must be true because
everything not saved is consumed:
DI = C + S
fraction income saved
So if DI ↑ $2,000
Savings =>
MPC = .60
Consumption =>
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
MPC = .60
MPS = .40