Consumption's & Savings

• Disposable income (DI)
• Income after taxes or net income
• DI = Cross Income - Taxes
• Two Choices: with disposable income, households can either...

1. Consume (spend $)
2. Save (not spend $)

• Consumption 
• Household spending
• Constrained by: 
• Amount of DI
• The propensity to save

• Do households consume DI = 0? 
• Autonomous consumption
• Dissaving

• Savings 
• households NOT spending
• Constrained by:
• Amount of DI
• Propensity to save
• Do households consume DI = 0? 
• No

APC & APS

• "APC" means average propensity to consume.
• "APS" means average propensity to save.
• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 change dissaving
• - APC change dissaving

MPC & MPS

• "MPC" means marginal propensity to consume
• The fraction of any change in disposable income that is consumed. 
• mpc = change in consumption / change in disposable income
• mpc  => C/ DI
• % of every extara dollar earned that is spent
• "MPS" means marginal propensity to save
• The fraction of any change in disposable income that is saved.
• mps = change in savings / change in disposable income
•  mps => S/ DI
• % of every extra dollar that is saved 
• MPC + MPS = 1
• 1 - MPS = MPC
• 1 - MPC = MPS

• Spending multiplier effect: An initial change in spending (c, ig, g, xn) causes a larger change in aggregated spending or aggregated demand. (AD)
• Multiplier = Change in AD / Change in spending 
• m = AD / C, Ig, G, Xn
• Why does this happen? Expenditures and income flows continuously which sets off a spending increase in the economy.
• Calculating spending multiplier: 
• M = 1 / 1- mpc OR m = 1 / mps 
• Multipliers (+) when increasing in spending. Multipliers ( - ) when there's a decrease in spending.
• Tax Multiplier (NEGATIVE ONLY)
• -mpc / 1 - mpc OR -mpc/mps
• Taxcut = (+) multiplier because there is now more money in the circular flow.