CONSUMPTION AND SAVING

Meaning of Consumption
Consumption is the using up of resources (economic resources) so that they
are not available in the future. Therefore consumption refers to the total
expenditure on goods and services which generate utility in the current period.
Generally, Yd = C + S where:
Y d is disposable

C is consumption

S is saving

Hence C = Yd −¿ S

TYPES OF CONSUMPTION
(i) AUTONOMOUS CONSUMPTION
It is that consumption which does not depend on the level of income.
This occurs because even when one’s income is zero, he or she can
get some money through borrowing from other people in order to
sustain the level of consumption.

(ii) INDUCED CONSUMPTION

This is consumption expenditure which depends on the level of
income therefore a change in income creates a change in the level of
induced consumption.
Induced consumption mainly depends on the marginal propensity to
consume (MPC).
Total consumption is the sum of autonomous consumption plus
induced consumption.

Total consumption = Autonomous consumption +¿ Induced

consumption.

In equation form:
Total consumption = Co +¿ bYd

Where C o is autonomous consumption, b is the MPC and Y d

is disposable income.
EXAMPLE
Given that a country has MPC 80% (0.8), autonomous consumption
is shs. 40 billion and disposable income is shs. 75 billion. Calculate:
(i) Induced consumption
(ii) Total consumption
EXERCISE
Given that in a country, MPC = 0.6, autonomous consumption
expenditure is 150 billion while disposable income is shs. 200 billion.
Calculate:
(i) Level of induced consumption
(ii) Total consumption
MARGINAL PROPENSITY TO CONSUME (MPC)
This is the fraction (proportion) of additional income which is used
for consumption. It is given by the formula below.
Change∈consumption
MPC = Change∈income

Or
ΔC
MPC = ΔY

EXAMPLE
In an economy, there is a change in income from shs. 60 billion to
shs. 100 billion while consumption rises from shs. 20 billion to shs.
40 billion. Calculate the size of the MPC.
AVERAGE PROPENSITY TO CONSUME (A P C)
This is the fraction of total income which is spent on consumption. It
is given by the formula:
Total Consumption
APC = Total Income

Or
C
APC =Y
 EXAMPLE
(i) Differentiate between Average Propensity to consume (A P C)
and marginal propensity to consume (M P C).
(ii) Given that a country’s total income is shs 60,000 billion and its
total consumption is shs. 48,000 billion; calculate its A P C.
FACTORS WHICH AFFECT/ DETERMINE/INFLUENCE CONSUMPTION
IN AN ECONOMY
NB: Neutral factors are presented. Explanation must be two- sided
showing how consumption becomes high and how it becomes low.
1. Level of disposable income. High levels of disposable income
increase aggregate demand and this leads to high levels of
consumption because more goods and services are being bought
while low levels of disposable income create low aggregate demand
which finally causes low consumption.
2. Level of savings. High levels of savings reduce the amount of money
available for current consumption and this leads to low
consumption in an economy. However, low levels of savings result
into high consumption because more money is being set aside to
finance current consumption.
3. Level of prices. High prices lead to low aggregate demand because
goods and services become more expensive thereby creating low
consumption. However, low prices lead to high aggregate demand
because goods and services are cheap. This creates high
consumption in an economy.
4. Availability of credit facilities to the consumers. Presence of credit
facilities like hire purchase leads to high levels of consumption
because of the high aggregate demand for the goods offered on
credit. However, absence of credit facilities leads to low aggregate
demand and low consumption.
5. Government policy on taxation and subsidization.
6. Size of the market/ size of the population.
7. Expectation of future changes in prices of commodities.
8. Level of income distribution.
9. Degree of advertisement for the commodities.
10.Existing political climate.
11.The time preference.
A DIAGRAM FOR THE CONSUMPTION FUNCTION CURVE

SAVING
Saving is the act of refraining (abstaining) from current
consumption in order to create funds for future use. In most case,
the level of saving depends on the level of income.
SAVINGS
This is part of one’s disposable income which is not spent in the
current period but it is kept for use in the future. The level of
savings largely depends on the marginal propensity to save.
SAVING FUNCTION
The saving function is one which shows the relationship between
savings of a household and the factors which determine savings
from the savings curve, it is observed that as income increases,
marginal propensity to save also increases.
MARGINAL PROPENSITY TO SAVE (M P S)
It is the fraction (proportion) of additional income in which is
saved. The M P S is given by the formula below:
Change∈Savings
MPS = Change∈income

Or
ΔS
MPS = ΔY

EXAMPLE
The house hold income increased from shs 800,000 to shs.
1,000,000. As a result of this, savings by the same household
increased from shs. 200,000 to shs. 250,000. Calculate
(i) Marginal propensity to save
(ii) Marginal propensity to consume

AVERAGE PROPENSITY TO SAVE (A P S)

This is the fraction (percentage) of total income which is put aside
as saving. It is given by the formula:
Total Savings
APS = Total Income

Or
S
APS = Y

EXAMPLE
Given that a consumer’s income is shs. 200,000 and total savings
are shs. 120,000. Calculate the A P S.
 FACTORS THAT INFLUENCE / AFFECT/DETERMINE THE LEVEL OF
SAVINGS
NB: The explanation must bring out how savings are high and high
and how they become low.
Generate the explanation
1. The level/size of income
2. The price levels/the rate of inflation
3. The interest rate on savings in commercial
4. Availability of banking facility facilities
5. The level of income distribution
6. Government policy on saving and investment
7. The tax rates in an economy
8. The political climate/political situation
9. The size of the commercial sector/ the level of monetization
10.Level of consumption/ the time preference
11.The level of exploitation of natural resources
12.The degree of uncertainty

EXERCISE
Study the table below which shows consumption and savings at
different levels of income. Make appropriate calculations and fill
in the missing figures.
Time Income Consumption Saving ∆ Y in ∆ C in ∆ S in MPC MPS
period (Y) (S) in shs (S) in shs shs shs ΔC ΔS
in shs shs ΔY ΔY
1 40,000 30,000 10,000
2 60,000 45,000
3 100,000 65,000 35,000
4 160,000 100,000