February 23, 2017

Disposable Income (DI) - income after taxes or net income

• DI = Gross Income - Taxes

Two Choices

• With disposable income, households can either consume (spend money on goods and services) or save (not spend money on goods and 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?
• YES (credit cards)
• 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

APC (Average Propensity to Consume) and APS (Average Propensity to Save)

• Average Propensity to Consume
• C / DI

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 = DIssaving
• Negative APS = DIssaving

MPC and MPS

• Marginal Propensity to Consume
• ΔC / ΔDI
• % of every extra dollar earned that is spent

• Marginal Propensity to Save
• ΔS / ΔDI
• % of every extra dollar earned that is saved

• MPC + MPS =1
• 1 - MPC = MPS
• 1 - MPS = MPC

Determinants of C and S

• Wealth
• Expectations
• Household Debt
• Taxes