Consumption and Savings Schedule

Empirical data reveals that consumption and savings are directly related to disposable income.

This graph reveals that households spend a large proportion of a small income than of a large income.

Recall that the 45° line is the line which represents all levels at which disposable income equals consumption.

There are three major sections to this graph:

1. The intersection of the 45°  line is the break-even income - where the money spent is the same as the money earned.

2. To the left of the intersection, there is dissavings.  Consumption exceeds income and households must borrow or use up some of their wealth

3. To the right of the intersection, there is savings.  The difference between the 45° line and the consumption schedule is the savings.

The three major points on this graph are similar:

1. The intersection of the savings schedule with the x axis represents the point at which all money is spent (break-even income)

2. To the left of the intersection, there is dissavings

3. To the right of the intersection is savings

Propensities

Average Propensity to Consume (APC) is the fraction, or percentage, of any total income that is consumed.

APC = consumption / income

Average Propensity to Save (APS) is the fraction, or percentage, of any total income which is saved.

APS = savings / income

Mathematically, APC + APS = 1.

Looking at the above graphs, it follows that as DI (disposable income) rises, APC falls and APS rises.

Marginal Propensity to Consume (MPC) is fraction or proportion of any change in income that is consumed.

MPC = change in consumption / change in income

Marginal Propensity to Save (MPS) is the fraction or proportion of any change in income that is saved.

MPS = change in savings / change in income

Mathematically, MPC + MPS = 1

It is important to note that MPC is the slope of the consumption schedule, and MPS is the slope of the savings schedule.

Determinants of Income

• The greater the amount of wealth a household has, the greater the consumption and the smaller the savings.

• Expectations of rising prices trigger more spending and less savings.

• The more debt a consumer has, the smaller the consumption and the greater the savings

• An increase in taxes will shift both the consumption and savings schedules downward.

It is important to note that economists generally agree that consumption and savings schedules are very stable.

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