1 / 12

Chapter Three Consumption and Saving

This chapter delves into the analysis of consumption and saving, exploring key factors influencing consumer behavior such as disposable income, interest rates, and personal wealth. The consumption function is defined, illustrating the relationship between consumption and income levels. Key terms like Average and Marginal Propensity to Consume are discussed, alongside the short-run and long-run consumption curves. Additionally, the chapter covers modern consumption theories, including Absolute and Relative Income Theories, and introduces the concept of permanent income theory, highlighting its implications on lifelong consumer behavior.

moshe
Télécharger la présentation

Chapter Three Consumption and Saving

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter ThreeConsumption and Saving 1. Consumption and saving analysis • Factors affect consumption current disposable income; foresight of income and price; interest rate for consumer’s credit; catch up with somebody; social security system; personal wealth

  2. Factors affect saving precaution; foresight; interest rate; independence; enterprise; pride; avarice and miser

  3. 2. Consumption Function • Definition The relationship between consumption and factors that affect consumption is described by the consumption function. • Especially we assume the that consumption increases with the level of disposable income: C = a + b Yd

  4. Autonomous consumption variable a in C function ----represents the level of consumption when income is zero----the intercept on vertical axis of the C-curve • Induced Consumption be varied with income level---- the slope of the consumption curve and b Ydin C function

  5. Propensity to consume Average propensity to consume (APC) APC = C/Yd -----is the proportion of consumption to income . Marginal propensity to consume (MPC) MPC = ∆C/∆Y ------ is the increase in consumption per unit increase in income. It is represented by variable b in C function.

  6. 3. Short-run & long-run consumption curve • “Paradox of consumption function” • The shift of the Cs curve • Derivation of the CL-curve • Explain of the shift in the short-run curves

  7. 4. Saving Function • Definition------Saving is equal to income minus consumption. • APS & MPS : MPC+MPS=1 ; APC+APS=1 • Saving curve • Saving function S = Yd - C = - a + (1-b) Yd

  8. 5. Modern Consumption Theory • Absolute Income Theory • Relative Income Theory

  9. Life-cycle Theory Some assumptions Basic function C = a WR + c YL where: a ---- MPC out of wealth WR ---- real wealth c ----- MPC out of labor income YL----- labor income

  10. With lifetime consumption equal to lifetime income, we have C×NL = YL ×WL C = YL × WL/ NL Case: Numerical example Summarize: C is constant over the consumer`s lifetime and financed by lifetime income plus initial wealth.

  11. During each year, a fraction,1/(NL - T), of wealth will be consumed, where (NL - T) is the life expectancy. Current consumption spending depends on current wealth and lifetime income.

  12. Permanent income theory A) The form of the theory: C = c YP YP----- permanent disposable income c------ is the MPC B) Estimating of the YP: YP = Y-1 +θ(Y - Y-1) =θY+(1-θ)Y-1 C) Permanent Income and Consumption C = cYP = cθY + c(1-θ)Y-1

More Related