1. Module 16B-Alphabet Soup and Economics
J.A.SACCO

2. Real Consumption and Saving Schedules: A Hypothetical Case
(1) (2) (3) (4) (5) (6) (7)
Planned Average Average
Real Planned Real Saving Propensity Propensity Marginal Marginal
Disposal Real Con- Per Year to Consume to Save Propensity Propensity
Income per sumption (S=Yd-C) (APC=C/Yd) (APS=S/Yd) to Consume to Save
Combination Year (Yd) per year (C) (1) - (2) (2)/(1) (3)/(1)
A $0
B 2,000
C 4,000
D 6,000
E 8,000
F 10,000
G 12,000
H 14,000
I 16,000
J 18,000
K 20,000
$2,000
3,600
5,200
6,800
8,400
10,000
11,600
13,200
14,800
16,400
18,000
$-2,000
-1,600
-1,200
-800
-400
400
800
1,200
1,600
2,000
----
1.8
1.3
1.133
1.05
1.0
.967
.943
.925
.911 .9
----
-.8
-.3
0.133
-.05 .0
.033
.057
.075
.089 .1
---- .8
---- .2
Looked at the basics of the Consumption function, now lets look at how a change in disposable income affects consumption and saving habits.

3. Determinants of Planned Consumption and Planned Saving
Average Propensity to Consume (APC)
Consumption divided by disposable income
The proportion of total disposable income that is consumed Or
C/Yd

4. Determinants of Planned Consumption and Planned Saving
Average Propensity to Save (APS)
Saving divided by disposable income
The proportion of total disposable income that is saved Or
S/Yd

5. Determinants of Planned Consumption and Planned Saving
Since the proportion of income spent and saved
must equal 100% of disposable income, then the

6. APC+APS=0.967(APC)+0.033(APS)=1.00ALWAYS Equals 1.00!
Determinants of Planned Consumption and Planned Saving
For Example:
Real Disposable Income (RDI)=$6000
Consumption (C)=$5800, Saving(S)=$200
APC=C/RDI=$5800/$6000=0.967
APS=S/RDI=$200/$6000=0.033
APC+APS=0.967(APC)+0.033(APS)=1.00ALWAYS Equals 1.00!

7. Determinants of Planned Consumption and Planned Saving
Example
Income = $18,000
C = $16,400
S = $1,600

8. Determinants of Planned Consumption and Planned Saving
Example
Income increases $2,000 to $20,000
C = $18,000
S = $2,000

9. Determinants of Planned Consumption and Planned Saving
Question
What is your APC and APS?

10. Determinants of Planned Consumption and Planned Saving
Marginal Propensity to Consume (MPC).
The ratio of the change in consumption to the change in disposable income.
Percentage of any additional disposable income that is consumed.
Or ΔC/ΔRDI

11. Determinants of Planned Consumption and Planned Saving
Marginal Propensity to Save (MPS).
The ratio of the change in saving to the change in disposable income.
The percentage of any additional income that is saved.
Or ΔS/ΔRDI

12. Determinants of Planned Consumption and Planned Saving
Since 100% of any change in disposable income must be consumed or saved, then the MPC +MPS=1.
For Example- RDI increases by $1000, consumption increases by $800, and saving increases by $200.
MPC= Change in C/Change in Income=$800/$1000=0.8 or 80% of NEW income consumed.
MPS= Change in S/Change in Income=$200/$1000=0.2 or 20% of NEW income saved.
Therefore-MPC+MPS= = 1.00.
ALWAYS EQUALS 1.
Note- MPC is constant slope of consumption function.
MPS is constant slope of saving function.

13. Determinants of Planned Consumption and Planned Saving
Example
Income1 = $18,000 Income1 = $20,000 C1 = 16,400 C2 = 18,000
S1 = 1,600 S2 = 2,000
3) APC? 4) APS? 5) MPC?
6) MPS?
1) APC?
2) APS?

14. Determinants of Planned Consumption and Planned Saving
Then if:

15. Khan Academy- MPC and the Multiplier
Quick Quiz
The proportion of any additional income that is consumed is the _______ propensity to ________.
The proportion of total disposable income that is saved is the _______ propensity to _____.
marginal
consume
average
save
Khan Academy- MPC and the Multiplier