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Consumption And Saving Function

Group Members Raheel Wasiq Dewan Syed Faisal Rameez Muhammad Ali

Topic Cover
Consumption Function Saving Function Determinants of Consumption & Saving

Consumption
This involves expenditure on goods and services, such as food, fuel, clothing etc. However, consumption can be split down further into durable and non-durable purchases. Durable purchases are those that are going to last a long time. These include items like cars, televisions & house etc. are all durable goods. Non-durable purchases are those that only last for a short period of time and are 'used up'. A good example of this is going to the shops to buy food and drink.

Type of Consumption with Respect to Income Level


Consumption

Autonomous

Induced

Autonomous Consumption
Autonomous consumption expenditure C A occurs when income levels are zero. Such consumption does not vary with changes in income. If income levels are actually zero, this consumption is financed by borrowing or using up savings.

Autonomous Consumption Graph

Autonomous Consumption

Induced Consumption
Induced consumption CI describes consumption expenditure by households on goods and services which varies with income. Consumption is considered induced by income.

Induced Consumption - Graph

Induced Consumption

Marginal Propensity to Consume


The marginal propensity to consume (MPC) is the extra amount that people consume when they receive an extra unit of income.
MPC = C / Y

Induced consumption can be described by formula: CI = MPC . Y

The Consumption Function


The consumption function shows the relationship between the level of consumption expenditure and the level of income.
C = f (Y) If autonomous and induced consumption is identified then: C = CA + CI C = CA + MPC . Y

The Consumption Function Graph


C Savings Consumption function C = f(Y) CA
45

Consumption

Y1

Y2

The Consumption Function


45 line: at any point on the 45line consumption exactly equals income and the households have zero saving. MPC is the slope of the consumption function, which measures the change in consumption per unit change in income.

Savings
Saving is that part of income that is not consumed. Saving equals income minus consumption: S = Y C Income is the sum of consumption and savings: Y = C + S

Marginal Propensity to Savings


The marginal propensity to save is defined as the fraction of an extra unit of income that goes to extra saving. MPC + MPS = 1 because the part of each unit of income that is not consumed is necessarily saved.
S MPS = Y
C S + =1 Y Y
C S + =1 Y Y

Saving Function
Like consumption saving is also the function of income: S = f(Y) Saving function is: S = -CA + MPS.Y Saving is a source for investment.

The Consumption and Saving Function - Graph


C, S The saving function is the mirror image of the consumption function. It shows the relationship between the level of saving and income. C = f(Y)

CA 0 -CA
45 YE

S = f(Y)

Determinants of Consumption & Saving Level


Current Disposable Income It is the central factor determining a nation's consumption.

Determinants of Consumption & Saving Level


Wealth it is the net value of tangible and financial items owned by a nation or person at a point of time.

Determinants of Consumption & Saving Level


Interest Rate

Determinants of Consumption & Saving Level


Inflation Rate

Determinants of Consumption & Saving Level


Expectation

Determinants of Consumption & Saving Level


Age

End

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