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Alphabet Soup and Economics

Alphabet Soup and Economics. J.A.SACCO. Real Consumption and Saving Schedules: A Hypothetical Case. (1) (2) (3) (4) (5) (6) (7) Planned Average Average Real Planned Real Saving Propensity Propensity Marginal Marginal

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Alphabet Soup and Economics

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  1. Alphabet Soup and Economics J.A.SACCO

  2. Real Consumption and Saving Schedules: A Hypothetical Case (1) (2) (3) (4) (5) (6) (7) Planned Average Average Real Planned Real Saving Propensity Propensity Marginal Marginal Disposal Real Con- Per Year to Consume to Save Propensity Propensity Income per sumption (S=Yd-C) (APC=C/Yd) (APS=S/Yd) to Consume to Save Combination Year (Yd) per year (C) (1) - (2) (2)/(1) (3)/(1) A$0 B 2,000 C 4,000 D 6,000 E 8,000 F 10,000 G 12,000 H 14,000 I 16,000 J 18,000 K 20,000 $2,000 3,600 5,200 6,800 8,400 10,000 11,600 13,200 14,800 16,400 18,000 $-2,000 -1,600 -1,200 -800 -400 0 400 800 1,200 1,600 2,000 ---- 1.8 1.3 1.133 1.05 1.0 .967 .943 .925 .911 .9 ---- -.8 -.3 0.133 -.05 .0 .033 .057 .075 .089 .1 ---- .8 .8 .8 .8 .8 .8 .8 .8 .8 .8 ---- .2 .2 .2 .2 .2 .2 .2 .2 .2 .2

  3. Determinants of Planned Consumption and Planned Saving • Average Propensity to Consume (APC) • Consumption divided by disposable income • The proportion of total disposable income that is consumed Or C/Yd

  4. Determinants of Planned Consumption and Planned Saving • Average Propensity to Save (APS) • Saving divided by disposable income • The proportion of total disposable income that is saved Or S/Yd

  5. Determinants of Planned Consumption and Planned Saving Since the proportion of income spent and saved must equal 100% of disposable income, then the

  6. Determinants of Planned Consumption and Planned Saving • For Example: Real Disposable Income (RDI)=$6000 Consumption (C)=$5800, Saving(S)=200 APC=C/RDI=$5800/$6000=0.967 APS=S/RDI=$200/$6000=0.033 APC+APS=0.967(APC)+0.033(APS)=1.00ALWAYS Equals 1.00!

  7. Determinants of Planned Consumption and Planned Saving • Example • Income = $18,000 • C= $16,400 • S = $1,600

  8. Determinants of Planned Consumption and Planned Saving • Example • Income increases $2,000 to $20,000 • C = $18,000 • S = $2,000

  9. Determinants of Planned Consumption and Planned Saving • Question • What is your APC and APS?

  10. Determinants of Planned Consumption and Planned Saving • Marginal Propensity to Consume (MPC). • The ratio of the change in consumption to the change in disposable income. • Percentage of any additionaldisposable income that is consumed. Or ΔC/ΔRDI

  11. Determinants of Planned Consumption and Planned Saving • Marginal Propensity to Save (MPC). • The ratio of the change in saving to the change in disposable income. • The percentage of any additional income that is saved. Or ΔS/ΔRDI

  12. Determinants of Planned Consumption and Planned Saving • Since 100% of any change in disposable income must be consumed or saved, then the MPC +MPS=1. • For Example- RDI increases by $1000, consumption increases by $800, and saving increases by $200. MPC= Change in C/Change in Income=$800/$1000=0.8 or 80% of NEW income consumed. MPS= Change in S/Change in Income=$200/$1000=0.2 or 20% of NEW income saved. Therefore-MPC+MPS=0.8+ 0.2= 1.00. ALWAYS EQUALS 1. Note- MPC is constant slope of consumption function. MPS is constant slope of saving function.

  13. Determinants of Planned Consumption and Planned Saving • Example Income1 = $18,000 Income1 = $20,000 C1 = 16,400 C2 = 18,000 S1 = 1,600 S2 = 2,000

  14. Determinants of Planned Consumption and Planned Saving • Then if:

  15. Quick Quiz • The proportion of any additional income that is consumed is the _______ propensity to ________. • The proportion of total disposable income that is saved is the _______ propensity to _____. marginal consume average save

  16. Determinants of Planned Consumption and Planned Saving • Causes of Shifts in the Consumption Function. • Non-income determinants of consumption. • Population- Increase consumption function upward. • Expectations- Better times upward/worse times downward. • Wealth- Increase real household wealth upward/decrease downward. • Can you think of other non-income determinants of consumption?

  17. Determinants of Planned Consumption and Planned Saving • Household Debt- Can increase consumption with borrowing or more debt. However as accumulate more debt, need to use more disposable income to pat off debt thus decreasing consumption. • Inflation- Inflation down/upward, inflation up/downward. • Taxes/Transfer Payments- more taxes C and S down/ less taxes C and S up. More transfer payments both C and S up, less C and S down.

  18. 45o C2 C2 C1 C1 Y1 Y2 The Consumptionand Saving Functions Assume positive economic expectations Planned Real Consumption (C, dollars per year) Real Disposable Income (Yd dollars per year)

  19. 45o C1 C2 C1 C2 Y2 Y1 The Consumptionand Saving Functions Planned Real Consumption (C, dollars per year) Assume wealth decreases Y2 Real Disposable Income (Yd dollars per year)

  20. The Consumptionand Saving Functions • Therefore an upward shift in consumption tells us that at all levels of disposable income, consumption is greater. If consumption is greater at all levels of disposable income, saving must be lower., and vice-versa. The only exception is taxes and transfer payments.

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