eco pppt consumption

7/28/2019 Eco PPPT Consumption

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Consumption And SavingFunction

Group Members

Raheel

Wasiq Dewan Syed Faisal

Rameez Muhammad Ali


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TopicCover

Consumption Function

Saving Function

Determinants of Consumption & Saving


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Consumption

This involves expenditure on goods and services, such as food, fuel,

clothing etc. However, consumption can be split down further intodurable and non-durable purchases.

Durable purchases are those that are going to last a long time. Theseinclude items like cars, televisions & house etc. are all durable goods.

Non-durable purchases are those that only last for a short period oftime and are 'used up'. A good example of this is going to the shops tobuy food and drink.


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Type of Consumption withRespect to Income Level

Consumption

Autonomous Induced


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Autonomous Consumption

Autonomous consumption expenditure CA

occurs when income levels are zero. Suchconsumption does not vary with changes inincome.

If income levels are actually zero, thisconsumption is financed by borrowing orusing up savings.


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Autonomous Consumption -Graph

AutonomousConsumption


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Induced Consumption

Induced consumption CI describesconsumption expenditure by households ongoods and services which varies with

income. Consumption is considered inducedby

income.


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Induced Consumption - Graph

InducedConsumption


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Marginal Propensity toConsume

The marginal propensity to consume

(MPC) is the extra amount that peopleconsume when they receive an extra unit ofincome.

MPC = C / Y

Induced consumption can be described byformula: C

I= MPC . Y


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The Consumption Function

The consumption function shows the

relationship between the level ofconsumption expenditure and the level ofincome.

C = f (Y)

If autonomous and induced consumption isidentified then: C = C

A+ C

I

C = CA+ MPC . Y


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The Consumption Function -Graph

Y

C

0

Consumptionfunction C = f(Y)

Savings

Consumption

45

Y1 Y 2

CA


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The Consumption Function

45 line: at any point on the 45lineconsumption exactly equals income and thehouseholds have zero saving.

MPC is the slope of the consumptionfunction, which measures the change inconsumption per unit change in income.


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Savings

Savingis that part of income that is notconsumed. Saving equals income minusconsumption: S = Y C

Income is the sum of consumption andsavings: Y = C + S


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Marginal Propensityto Savings

The marginal propensity to save is definedas the fraction of an extra unit of incomethat goes to extra saving.

MPC + MPS = 1 because the part of each

unit of income that is not consumed isnecessarily saved.

Y

SMPS

= 1=+

Y

S

Y

C1=

+

Y

S

Y

C


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Saving Function

Like consumption savingis also the function

of income: S = f(Y)

Saving function is: S = -CA+ MPS.Y

Savingis a source for investment.


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The Consumption and SavingFunction - Graph

Y

C, S

0

C = f(Y)

45

Y E

CA

-CA

S = f(Y)

The saving

function is themirror image ofthe consumptionfunction. It showsthe relationship

between the levelof saving andincome.


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Determinants of Consumption& Saving Level

Current Disposable IncomeIt is the central factor determining a nation's

consumption.


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Wealthit is the net value of tangible and financial items owned

by a nation or person at a point of time.


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Interest Rate


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Inflation Rate


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Expectation


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Age


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End

THANK YOU

eco pppt consumption

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