Chapter No 16

Consumption and Saving

Consumption
 Consumption
•Consumption:
 
It is a part of income which is spend on the commodities.
Y=C+S
C=Y-S
Consumption is a largest part of aggregate income.
This diagram shows the relationship
between income and consumption.
On Y-axis there is consumption and on X-
axis. As income increases consumption
also increases.
   this diagram Y line is line. At any point of this
In
line income is exactly equal to the expenditure.
Income consumption curve (C ) shows
propensity to consume at different level of
Saving income.
Before point D:
Consumption is higher than income
At point D:
Dis-saving Consumption is equal to income and there is no
saving.
D From point D onward:
Income consumption curve is below line so
consumption is less than income.
 Attributes of consumption Function
•Average
  propensity to consume(APC):
Percentage of consumption to income at different level of income.

Marginal propensity to consume(MPC):

It is a ratio of change in consumption to the change in disposable
income.
Autonomous consumption (co)

• It is the consumption not related with income

• If income increase, decrease or even zero autonomous consumption
remains same.
 Induced consumption (cy)
•  It is related with income
Saving
 Saving
• It is a part of income which is not spent and deposited in to the
financial institution.
• S=Y-C
 Creation Of Saving

Power to save Will to save

 Average propensity to save VS Marginal propensity
to save
• 
Average propensity to save (APS):
Percentage of saving to income at different level of income.

APC+APS=1
So
APS=1-APC
Marginal propensity to save (MPS):
It is a ratio of change in saving to the change in disposable income.

MPC+MPS=1
So
MPS=1-MPC
Investment:
Investment:
An addition to the nation’s physical stock of capital, finished goods,
goods in the pipelines of production and inventories over a period of
time
 Types of investment
Net investment:
New real capital assets and productive capacity of existing capital unit
increase e.g. Construction of new buildings.
Gross investment:
New investment and replacement and depression cost of the old
investment
Financial investment:
Real capital assets of a country do not increase e.g. purchase of already
existed
•Real
  investment:
Real capital assets of a country increase e.g. purchase of new things
Induced investment:
The investment that varies with change in national income.
 
Real investment:
Real capital assets of a country increase e.g. purchase of new
things
Induced investment:
The investment that varies with change in national income.
Autonomous investment:
An investment which is independent of the level of income. It depend
upon the level of population growth, inventions, innovations and
technical progress.
Y

Autonomous
investment
I

National Income X