Consumption and Saving

Disposable Income

• Income after taxes or net income
• DI = Gross Income - Taxes

2 choices

* with disposable income, household

- consume (spend money on goods, and services )

- save (not spend money on goods & services)

Consumption

• Household spending 
• the ability to consume is constrained by the amount of disposable income
• the propensity to save

* Do households consume if DI = O

- Autonomous consumption

-Dis-saving

• APC = C/ DI = DI that is Spent saving
• house hold NOT spending
• the ability to save is constrained by the amount of disposable income
• the propensity to consume

Do house holds save if DI + O

- NO

• APS = S/DI=%DI that is not spent

APC and APS

• APC+APS=1
• 1-APC = APS
• 1-APS =APC
• APC > 1.: dis-saving
• -APS.: Dis-saving

MPS and MPC

*Marginal Propensity to consume 

- change in C/ change in DI

-% of every extra dollar earned that is spend

* Marginal Propensity to save

- change in S/ change in DI

-% of every extra dollar earned that is save 

- MPC + MPS = 1

-1-MPC=MPS

-1-MPS=MPC