CONSUMPTION

# Y income s savings c consumption savings residual y c

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income change, consumption will change but not as much as the change in income itself. Y = income S = savings C = consumption savings = residual Y = C + S Y – C = S Saving Whatever is not consumed is considered savings. AVERAGE PROPENSITY TO CONSUME APC - measure the percentage of income spent. APC = C Y AVERAGE PROPENSITY TO SAVE APS - measure the percentage of income saved.

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- 2 - APS = S Y Rule: APC + APS = 1 MARGINAL PROPENSITY TO CONSUME MPC - measures the change of consumption resulting from a change in income. MPC = ∆C ∆Y MARGINAL PROPENSITY TO SAVE MPS - measures the change of saving resulting from a change in income. MPS = ∆S ∆Y Rule: MPC + MPS = 1 GRAPHING THE CONSUMPTION FUNCTION 45 0 Helping Line C Disposable Income Expenditures 0 200 300 100 400 500 600 100 200 230 260 300 330 380 400 430 500 600
- 3 - Consumption function line cannot start at 0 because even if D.I = 0, consumption is a matter of life and death. You have to consume to live. INDUCED VS AUTONOMOUS CONSUMPTION Induced consumption Consumption that depends on your income Autonomous consumption Consumption that does not depend on your income Total consumption is Autonomous plus Induced consumption C T = C A + C I DETERMINANTS OF CONSUMPTION 1) Disposable Income C = f (D.I) → C depends on D.I 2) Stock of liquid capital (cash) The more cash you have in your hand, the more you will buy and vise versa. Stocks, mutual funds are almost liquid 3) Amount of credit availability

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• Spring '10
• SM
• Macroeconomics, Consumption function, Milton Friedman, Thorstein Veblen, John M. Keynes

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