Wednesday, April 6, 2011

Consumption Function and Savings Function

Before reading this, read: Consumption and Savings

1. Consumption Function
The income identity is Y = C + S (income = consumption + savings)

C = a + b*Y Or, C = a + (ΔC / ΔY)*Y

MPC or Marginal propensity to Consume is "b". Y is the total income and b = ΔC / ΔY
In the diagram, "a" is the minimum consumption necessary to maintain oneself even at zero income. Now suppose the income increases to B. So AC is our familiar ΔY (change in income). Income increases from O to Yo, which is equal to AC. BC measures change in consumption ΔC, which is the resultant increase in consumption due to an increase in income.


2. Savings Function


MPS or Marginal Propensity to Save is "s". Y is the total income and s = ΔS / ΔY

Income multiplied by Marginal Propensity to Save or MPS or "S" will give us the total savings of the community.

Any point below the point B shows negative savings. B is called the break-even point or the point of zero savings. This means at point B, income = consumption and MPC = 1, as because MPS = 0.

The economic rationale is that at low levels of income people consume more than they earn. At a certain minimum level of income, income is exactly equal to consumption. This is the break-even point in consumption, where savings = 0. Thereafter, with every increase in income, savings goes on increasing. Therefore MPS or s = change in savings / change in income = ΔS / ΔY.

1 comment:

  1. interesting blog. It would be great if you can provide more details about it. Thanks you
















    Function Point Estimation Training

    ReplyDelete

Want to say something? Say it!

Update(s):Post(s) under preparation: -
_______________________________________
View Chandra Bhanu's Art at Profoundfeeling.blogspot.com

LinkWithin

Related Posts Plugin for WordPress, Blogger...

Labels

indifference curve investment demand-pull inflation economy fiscal policy monetary policy cost-push inflation demand demand for money destabilized economy economics stagflation supply of money Opportunity Cost Quantity Theory of Money Theory of Consumption World economy automatic stabilizer capital choice consumption function current accounts deficit deflationary gap demand for investment depression derivation effects of inflation equilibrium fiscal deficit fresh investment growth imbalance inflation interest money perfect competition savings savings function world Accounting Profit Adam Smith Alfred Marshall Diminishing Marginal Utility Economic Profit Equimarginal Utility General Equilibrium Theory IS Curve J. M. Keynes Keynes' Theory of employment LM Curve Lionel Robbins Normal Profit PPC Production Possibility curve Software system development Utility Analysis accelerator account accounting alternative uses autonomous investment balance of payments book keeping capital goods classical theory of the rate of interest commodity consumer consumer goods consumption credit debit definition deflation discretionary double entry economic functions economic wants educated education ends energy ermployment full employment functions of money growth rate habit imitation imperfect competition income income analysis income determination income effect induced investment inflationary gap investment function knowledge labour less than full employment liquidity preference theory long run long run equilibrium means monetary analysis monetary measures monopoly multiplier price price effect price maker production possibility frontier profit maximization propensity revealed preference analysis sacrifice say's Law scarce science shifts of IS LM curves short run short run equilibrium shut down conditions slow down society stagnation student subsidies subsidy substitution effect success sunk capital supply supply of savings technology unproductive wealth world economy 2012