Unit 3: Consumption and Savings

• 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 and services)
• Save(not spend money on goods and 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=0?
• Autonomous consumption
• Dissaving

• Savings
• Households not spending 
• The ability to save is constrained by
• The amount of disposable income
• The propensity to consume
• Do households save if DI is 0?
• No

APC and APS (average propensity to consume save)

• APC+APS=1
• 1-APC=APS
• 1-APS=APC
• APC>1=Dissaving 
• APS=dissaving 

MPC and MPS

• Mariginal propensity to consume
• Change in C/ change in DI
• The fraction of any change in disposable income that is consumed
• %OF EVERY EXTRA DOLLAR EARNED THAT IS SPENT
• Marginal propensity to save 
• Change in s/ change in DI
• % of every extra dollar earned that is saved.
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC