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Consumption and Saving Schedule

Consumption and Saving Schedule. APC and APS. APC: average propensity to consume: APS: average propensity to save APC = C / D I and APS = S / DI The % of total income that is consumed (APC), and the % of total income that is saved (APS). APC falls and APS rises as DI increases.

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Consumption and Saving Schedule

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  1. Consumption and Saving Schedule Alomar_111_12

  2. Alomar_111_12

  3. APC and APS • APC: average propensity to consume: • APS: average propensity to save • APC = C / DI and APS = S / DI • The % of total income that is consumed (APC), and the % of total income that is saved (APS). • APC falls and APS rises as DI increases. Alomar_111_12

  4. MPC and MPS • MPC: marginal propensity to consume • MPS: marginal propensity to save MPC = ∆C / ∆DI and MPS = ∆S / ∆DI • The % of any change in income that is consumed (MPC) and the % of income that is saved (MPS) • MPC + MPS = 1 --- (1) Alomar_111_12

  5. MPC and MPS are slopes: The slope of the consumption schedule = MPC, the slope of the saving schedule = MPS. • Even when DI=0, C≠0. Alomar_111_12

  6. C Income (Y) Consumption Schedule Break-Even Point (C=Y) C Saving Dissaving 45o DI Alomar_111_12

  7. C Income (Y) Consumption Schedule Break-Even Point (C=Y) C Saving Dissaving 45o DI Autonomous C (a) Alomar_111_12

  8. S Saving Schedule + S 0 DI - Break-Even point (S=0) Alomar_111_12

  9. S Saving Schedule + S DI - Break-Even point (S=0) Autonomous C (-a) Alomar_111_12

  10. Determinants of Consumption and Saving • The most important factor is income (DI): an increase in DI will lead to an increase in C by (MPC.DI) and increase in S by (MPS.DI). • This will be a move along the C schedule and S schedule. • The same result apply when DI declines. • DI is the only factor that leads to a move along the lines. Alomar_111_12

  11. Non-income determinants: • Non-income factors will shift the C and S schedules. 1. Wealth: an increase in wealth will increase C and reduces S (shift the C schedule upward, S schedule downward). Alomar_111_12

  12. This is the case since people save to accumulate wealth. • As wealth increases, no need to save as much as before. • This is called “wealth effect”. Alomar_111_12

  13. 2. Expectations: about future prices and income level. • Expectations affect spending (C) and saving. • Expectations of an increase in price level (or future income): increase C and reduce S today, C schedule shifts upward while S schedule shifts downward. Alomar_111_12

  14. 3. Taxation: increase in taxes will shift both C and S schedules downward: DI = C + S + T While tax reduction will shift both upward (higher DI) Alomar_111_12

  15. 4. Household Debt: borrowing money allow C to shifts upward, but if the debt is large, then C may shift downward. Alomar_111_12

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