February 23, 2017

Consumption & Saving Notes 

What is disposable income?

• 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 ) 

what is consumption?

•  Household spending 
• He ability to consume is constrained by 
• -the amount of disposable income 
• - the propensity to save 
• Do households consume if DI = 0? 
• -autonomous consumption 
• - dissaving

What is saving? 

• Household NOT spending 
• The ability to save is constrained by 
• -amount of disposable income 
• -the propensity to consume 
• Do households save if D1=0?
• -no

How to calculate APC & APS

• APC + APS = 1 
• 1 - APC = APS
• 1 - APS = APC 
• APC > 1 = Dissaving 
• ( - ) APS = Dissaving

What is MPC & MPS? 

• MPC 
• change consumption / change D1
• % of every extra dollar earned that is spent 
• MPS 
• change in s / change in D
• % of every extra dollar earned that is caved 
• MPC + MPS = 1 
• 1 - MPC  =  MPS 
• 1 - MPS = MPC 

What are the determinants of consumption & saving?

1. Wealth
2. Expectations 
3. Household debt 
4. Taxes 

Reasons why prices tend to be inflexible or "sticky" in a downward direction?

1. Menu cost 
2. Wage Contracts
3. Minimum wage 
4. Fear of Price War 
5. Morale effort & productivity