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
Consumption and saving
 Primarily determined by Disposable Income (DI)
 Direct relationship

Consumption schedule (C)
 Planned household spending (in our model)

Saving schedule (S)
 DI minus C
 Dissaving can occur
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
1
The line C, which generalizes the relationship
between consumption and disposable income,
indicates a direct relationship and shows that
households consume most of their income.
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
2
APC =
APS =
MPC =
MPS =
©2013 McGraw-Hill Ryerson Ltd.
consumption
income
APC + APS = 1
saving
income
change in consumption
change in income
MPC + MPS = 1
change in saving
change in income
Chapter 8, LO1
3
(1)
Level of
Output and
Income
GDP=DI
(4)
(5)
(6)
(7)
Average
Propensity
to Consume
(APC),
Average
Propensity
to Save
(APS),
Marginal
Propensity
to Consume
Marginal
Propensity
to Save
(2)/(1)
(3)/(1)
(MPC),
(2)/(1)*
(MPS),
(3)/(1)*
(2)
Consumption
(C)
(3)
Saving (S),
(1) – (2)
(1) $370
$375
$-5
1.01
-.01
.75
.25
(2)
390
390
0
1.00
.00
.75
.25
(3)
410
405
5
.99
.01
.75
.25
(4)
430
420
10
.98
.02
.75
.25
(5)
450
435
15
.97
.03
.75
.25
(6)
470
450
20
.96
.04
.75
.25
(7)
490
465
25
.95
.05
.75
.25
(8)
510
480
30
.94
.06
.75
.25
(9)
530
495
35
.93
.07
.75
.25
40Chapter 8, LO1 .93
.07
.75
.25
(10)©2013
550
510
McGraw-Hill Ryerson Ltd.
4
Saving
(billions of dollars)
Consumption (billions of dollars)
C
LO1
Saving $5 billion
Consumption
schedule
Dissaving $5 billion
370 390 410 430 450 470 490 510 530 550
50
25
Dissaving
$5 billion
0
©2013 McGraw-Hill Ryerson Ltd.
Saving schedule
S
Saving $5 billion
370 390 410 430 450 470 490 510 530 550
Disposable income (billions of dollars)
Chapter 8, LO1
5
Source: Organization for Economic Cooperation and Development, OECD, www.oecd.org. Derived
from OECD household saving rates as percentages of disposable income.
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
6
C
Consumption
15
MPC = 20 = .75
C ($15)
Saving
DI ($20)
MPS =
5
= .25
20
S
S ($5)
DI ($20)
Disposable income
LO1
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
7
Amount of disposable income is the
main determinant
 Other determinants

 Wealth
 Borrowing
 Expectations
 Real interest rates
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
8





Switching to real GDP
Changes along schedules
Simultaneous shifts
Taxation
Stability
©2013 McGraw-Hill Ryerson Ltd.
Chapter 8, LO1
9
C1
C0
Saving
(billions of dollars)
Consumption
(billions of dollars)
C2
LO2
0
S2
S0
S1
+
0
-
©2013 McGraw-Hill Ryerson Ltd.
Real GDP (billions of dollars)
Chapter 8, LO1
10
10-10