part 2 consumption and savings

8/12/2019 Part 2 Consumption and Savings

1/15


2/15

CONSUMPTIONANDSAVINGS

The additional income that the system generates by

the multiplier process savings outflow

If initially generated through borrowing -- savingsoutflow can be used for debt payments

Therefore, generating more income means more savingsoutflow to retire more debts and reduce what the economy

owes to its past accumulated savings.


3/15

CONSUMPTIONANDSAVINGS

Income will be fully generated when the debtbalance is reduced to ZERO..

S= I , is reached

Accumulated savings outflow is just enough to payfor the said borrowings which financed the inflow ofinitial consumption.

Note : not to be misled by the conclusion that netsavings have been generated

We are only replacing what has been borrowed


4/15

GRAPHICALANDTABULARILLUSTRATIONS


5/15

FIG. 35 IN REFERENCETOTHEBOOK


6/15

FIG. 35BOOK

X- axisIncome

Y- axisConsumption Line cconsumption line

Line yincome line, 45-degree

At the graphs point of origin, Income level is 0 whileconsumption on the other hand is 100 w/c isfinanced by the borrowings from the economysstock of savings

MPC= 0.80, M= 5

M=1

1()=

1

1(0.80)=

1

0.20= 5

Consumption changes by 80

when income changes by 100In reference to the graph.


7/15

The multiplier process is illustrated by the

diminishing difference between line y and c

as the income level increases on the graph

Assumes that households are the

economys only factor contributors,

no circular flow leakages originates fromfirms


8/15

First vertical arrow is the initial IncomeSecond vertical arrow represents the income

(consumption) that the system subsequently

generates

The length of the arrow diminishes as the

system generates more income indicating

the depleting effects of savings on circular

flow payments

The process stops at the point of

intersections of line y and c equilibrium


9/15

The multiplier process also reflects how the

system generates income from every peso

of inflow

M = [ 1+ (mpc)+ (mpc2) + (3) n]

Where MPC < 1

n= infinitely small value implying thatnothing is left at this point to further generate

income


10/15

ONTHEOTHERHAND

The 20 % of income goes to savings outflow and

creates

Dissavings less than

Savings

greater than

Income

Above the equilibrium level yields net savings

At the equilibrium levelneither net savings ornet dissavings

The borrowing of 100 from

the economys stock of

accumulated savings


11/15

FACTORSOF

CONSUMPTION

Framework

Taste or Preference

Population

Income

Price Level

Innovation and Promotion

Engels law and the compositionalchange in consumption expenditure


12/15

The consumption line pivots upward C2 wherein

The same increase in income yields greater

consumption and marginal propensity to consume


13/15

FRAMEWORK

- demand factors are not the only direct

determinants of consumption..

Direct influences of these factors may alsodetermine consumption spending when

treated as an aggregate

Changes in determinant can vary the

economys propensity to consume.


14/15

INREFERENCETOTHEGRAPHFIG, 36

and also

From 500- 550increase in consumption

Bigger leap in equilibrium income from 500 to1000

More consumption means more income left inthe circular flow for recirculation whichmultiplies into higher income levels

On the other hand, The multiplier worksnegatively when consumption decreases


15/15

Income level can influence consumption as a

source

Additional income yields additional consumptiontherefore, income level varies directly with

consumption along line C in figures presented

Savings factors indirectly determine consumptionsince both can be traded for each other in the same

personal income

part 2 consumption and savings

Documents