Consumption & Saving

Disposable Income (DI)

• Income after taxes or net income 
• DI= Gross Income - Taxes

2 choices: 

• With disposable income, households can either 
• Consumer (spend money on goods & services)
• Save (not spend money on goods & 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 

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, there is nothing to save 

APC & APS

APC= Average propensity to consumer

APS= Average propensity to save

APC + APS = 1

APC > 1 : Dissaving 

-APS : Dissaving 

MPC & MPS

• Marginal Propensity to Consume
• change in C/ change in DI
• % 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

Determinants of Consumption and Saving: 

• Wealth
• Expectation 
• Households Debt
• Taxes