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Understanding Consumption and Saving: The Role of Disposable Income in Household Economics

This guide offers insights into the fundamental concepts of consumption and saving within macroeconomics, focusing on disposable income (DI). Disposable income represents the income available after taxes, influencing household decisions to either consume goods and services or save for future needs. Key concepts include the average propensity to consume (APC), average propensity to save (APS), and the impact of wealth, expectations, and household debt on consumption and saving behaviors. Understanding these dynamics is essential for grasping economic stability and growth.

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Understanding Consumption and Saving: The Role of Disposable Income in Household Economics

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  1. Mr. MayerAP Macroeconomics Consumption & Saving

  2. Disposable Income (DI) • Income after taxes or net income • DI = Gross Income - Taxes

  3. 2 Choices • With disposable income, households can either • Consume (spend money on goods & services) • Save (not spend money on goods & services)

  4. 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 • APC = C/DI = % DI that is spent

  5. 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 • APS = S/DI = % DI that is not spent

  6. APC & APS • APC + APS = 1 • 1 – APC = APS • 1 – APS = APC • APC > 1 .: Dissaving • -APS .: Dissaving

  7. MPC & MPS • Marginal Propensity to Consume • ΔC/ΔDI • % of every extra dollar earned that is spent • Marginal Propensity to Save • ΔS/ΔDI • % of every extra dollar earned that is saved • MPC + MPS = 1 • 1 – MPC = MPS • 1 – MPS = MPC

  8. Determinants of C & S • Wealth • Increased wealth .: Inc. C & Dec. S • Decreased wealth .: Dec. C & Inc. S • Expectations • Positive .: Inc C & Dec S • Negative .: Dec C & Inc S • Household Debt • High Debt .: Dec C & Inc S • Low Debt .: Inc C & Dec S • Taxes • Taxes Inc .: Dec C & Dec S • Taxes Dec .: Inc C & Inc S

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