2/23/17: Consumption & Savings

• Disposable Income (DI)
• Income after taxes or net income
• DI = Gross income - Taxes
• 2 Choices
• With disposable income, households can either
• Consume (spend money on goods & services)
• Save (not spend money on goods & services)
• Consumption
• Household spending
• The ability to consume is contained by
• The amount of disposable income
• The propensity to save
• Do households consume if DI = 0?
• Autonomous consumption
• Dissaving
• Saving 
• Household NOT spending
• The ability to save is constrained by
• The amount of disposable income 
• The propensity to consume  
• Do households save if DI = 0?
• No
• APC & APS (Average Propensity to Consume & Average Propensity to Save)
• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 = Dissaving
• -APS = Dissaving

• MPC & MPS
• Marginal Propensity to Consume
• Change in Consumption / Change in DI
• % of every extra dollar earned that is spent.
• Marginal Propensity to Save
• Change in Savings / Change in DI
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1 - MPC = MPS
• 1 - MPS = MPC

• Determinants of Consumption & Savings 
• Wealth
• Expectations
• Household debts
• Taxes