CONSUMPTION AND SAVINGS

The additional income that the system generates by the multiplier process savings outflow If initially generated through borrowing -- savings outflow can be used for debt payments
Therefore, generating more income means more savings outflow to retire more debts and reduce what the economy owes to its past accumulated savings.

CONSUMPTION AND SAVINGS

Income will be fully generated when the debt balance is reduced to ZERO.. S= I , is reached Accumulated savings outflow is just enough to pay for the said borrowings which financed the inflow of initial consumption.

Note : not to be misled by the conclusion that net savings have been generated
We are only replacing what has been borrowed

GRAPHICAL AND TABULAR ILLUSTRATIONS

FIG.

35 IN REFERENCE TO THE BOOK

FIG. 35 BOOK
X- axis Income Y- axis Consumption Line c consumption line Line y income line, 45-degree

At the graphs point of origin, Income level is 0 while consumption on the other hand is 100 w/c is financed by the borrowings from the economys stock of savings MPC= 0.80, M= 5 M=
1 1()

Consumption changes by 80 when income changes by 100 In reference to the graph.

1 1 = = 1(0.80) 0.20

 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 from firms

 First

vertical arrow is the initial Income Second 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

 The

multiplier process also reflects how the system generates income from every peso of inflow 2 3 M = [ 1+ (mpc)+ (mpc ) + ( ) n]

Where MPC < 1 n= infinitely small value implying that nothing is left at this point to further generate income

ON THE OTHER HAND

The 20 % of income goes to savings outflow and creates The borrowing of 100 from Dissavings less than the economys stock of Savings greater than accumulated savings

Income Above the equilibrium level yields net savings At the equilibrium level neither net savings or net dissavings

Framework

Taste or Preference

FACTORS OF CONSUMPTION

Population Income
Price Level Innovation and Promotion Engels law and the compositional change in consumption expenditure

The consumption line pivots upward C2 wherein The same increase in income yields greater consumption and marginal propensity to consume

FRAMEWORK
-

demand factors are not the only direct determinants of consumption.. influences of these factors may also determine consumption spending when treated as an aggregate

Direct

Changes

in determinant can vary the economys propensity to consume.

IN REFERENCE TO THE GRAPH FIG, 36

and also From 500- 550 increase in consumption Bigger leap in equilibrium income from 500 to 1000
More

consumption means more income left in the circular flow for recirculation which multiplies into higher income levels the other hand, The multiplier works negatively when consumption decreases

On

Income level can influence consumption as a source Additional income yields additional consumption therefore, income level varies directly with consumption along line C in figures presented Savings factors indirectly determine consumption since both can be traded for each other in the same personal income