Unit 3: Consumption and Savings

Disposable Income

• Income After Taxes (Net Income)

There are 2 Choices

• Consume (Spend money on goods and services)
• Save (Not Spend money on goods and services)

Consumption

• Household Spending 
• Ability to consume is constrained by 
• The amount of disposable income
• The Propensity to Save 

Do Households consume if DI=O?

• Autonomous Consumption
• Dis savings 

Savings

• Household NOT saving
• The Ability to save is constrained by
• The Amount of DI 
• Propensity To Consume 

Do Households Save if DI=O?

Formulas
APC+APS
APC+APS=1
1-APC=APS
1-APS=APC
APC>1 (Dissaving)
-APS (Dissaving)

MPC & MPS

• Change in C/ Change DI (% of every $ earned that is spent

MPS

• Change in S/Change in DI 

MPC+MPS=1

1-MPS=MPC

1-MPC=MPS