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Consumption And SavingFunction
Group Members
Raheel
Wasiq Dewan Syed Faisal
Rameez Muhammad Ali
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TopicCover
Consumption Function
Saving Function
Determinants of Consumption & Saving
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Consumption
This involves expenditure on goods and services, such as food, fuel,
clothing etc. However, consumption can be split down further intodurable and non-durable purchases.
Durable purchases are those that are going to last a long time. Theseinclude items like cars, televisions & house etc. are all durable goods.
Non-durable purchases are those that only last for a short period oftime and are 'used up'. A good example of this is going to the shops tobuy food and drink.
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Type of Consumption withRespect to Income Level
Consumption
Autonomous Induced
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Autonomous Consumption
Autonomous consumption expenditure CA
occurs when income levels are zero. Suchconsumption does not vary with changes inincome.
If income levels are actually zero, thisconsumption is financed by borrowing orusing up savings.
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Autonomous Consumption -Graph
AutonomousConsumption
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Induced Consumption
Induced consumption CI describesconsumption expenditure by households ongoods and services which varies with
income. Consumption is considered inducedby
income.
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Induced Consumption - Graph
InducedConsumption
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Marginal Propensity toConsume
The marginal propensity to consume
(MPC) is the extra amount that peopleconsume when they receive an extra unit ofincome.
MPC = C / Y
Induced consumption can be described byformula: C
I= MPC . Y
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The Consumption Function
The consumption function shows the
relationship between the level ofconsumption expenditure and the level ofincome.
C = f (Y)
If autonomous and induced consumption isidentified then: C = C
A+ C
I
C = CA+ MPC . Y
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The Consumption Function -Graph
Y
C
0
Consumptionfunction C = f(Y)
Savings
Consumption
45
Y1 Y 2
CA
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The Consumption Function
45 line: at any point on the 45lineconsumption exactly equals income and thehouseholds have zero saving.
MPC is the slope of the consumptionfunction, which measures the change inconsumption per unit change in income.
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Savings
Savingis that part of income that is notconsumed. Saving equals income minusconsumption: S = Y C
Income is the sum of consumption andsavings: Y = C + S
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Marginal Propensityto Savings
The marginal propensity to save is definedas the fraction of an extra unit of incomethat goes to extra saving.
MPC + MPS = 1 because the part of each
unit of income that is not consumed isnecessarily saved.
Y
SMPS
= 1=+
Y
S
Y
C1=
+
Y
S
Y
C
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Saving Function
Like consumption savingis also the function
of income: S = f(Y)
Saving function is: S = -CA+ MPS.Y
Savingis a source for investment.
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The Consumption and SavingFunction - Graph
Y
C, S
0
C = f(Y)
45
Y E
CA
-CA
S = f(Y)
The saving
function is themirror image ofthe consumptionfunction. It showsthe relationship
between the levelof saving andincome.
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Determinants of Consumption& Saving Level
Current Disposable IncomeIt is the central factor determining a nation's
consumption.
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Determinants of Consumption& Saving Level
Wealthit is the net value of tangible and financial items owned
by a nation or person at a point of time.
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Determinants of Consumption& Saving Level
Interest Rate
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Determinants of Consumption& Saving Level
Inflation Rate
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Determinants of Consumption& Saving Level
Expectation
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Determinants of Consumption& Saving Level
Age
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End
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