The Savings

Function
Group IV

1
Savings Function
Considered as mirror image of
consumption function
-relates saving to disposable income, for
what is saved is part of an income that is
not consumed

12-2
Simplifying Assumptions
in a Keynesian Model
 Disposable Income
 GDP minus net taxes, or after-tax
real income
 Consumption
 Spending on new goods and services out of a
household’s current income
 Whatever is not consumed is saved.
 Consumption includes such things as buying food and
going to a concert.
12-3
 Saving
 The act of not consuming all of one’s current
income
 Whatever is not consumed is, by definition,
saved.
 Saving is an action measured over time (a flow).
 Savingsare a stock, an accumulation resulting
from the act of saving in the past.
 Dissaving
 Negative saving; a situation in which spending
exceeds income
12-4
Saving equals disposable
income minus consumption.

S=Yd-C

12-5
Determinants of Planned Consumption and
Planned Saving
 In the classical model, the supply of saving was
determined by the rate
of interest.
 The higher the rate, the more people wanted to save,
the less they wanted
to consume.

12-6
Determinants of Planned Consumption and
Planned Saving

 Dissaving
 Negative saving; a situation in which spending
exceeds income
 Dissaving can occur when a household is
able to borrow or use up existing assets.

12-7
Figure 12-1 The Consumption
and Saving Functions

12-8
 5
MPS = = .25
20
Saving

S (5)
Yd (20)

Disposable income

12-9
Determinants of Planned Consumption and
Planned Saving

 Marginal Propensity to Save (MPS)

 The ratio of the change in saving to the
change in disposable income

Change in saving (∆S)

MPS =
Change in disposable income(∆Yd)

12-10
Marginal Propensity to MPS
Save= DS/DYd
ITEM Yd C Savings MPS APS
a 1000 1200 -200

M
P

0 0
1000 -200
B 2000 2000 0 0-(-200)/1000=0.2
0.20
1000 200 200-0/1000=0.2

0 0.1
Disposable
C 3000 2800 Savings 200 400-200/1000=0.2
0.20
Income
D 4000 3600 400 0.20

MPS =
Dsavngs/Ddisposable
income
Determinants of Planned Consumption and
Planned Saving

 Average Propensity to Save (APS)

 Saving divided by real disposable income
(Yd)
 Saved proportion of Yd

savings(S)
APS =
disposable income(Yd)
12-12
Average Propensity toAPS=
SaveS/Yd
Item Yd C Savings MPS APS
A 1000 1200 -200 -0.20 -200/1000= -0.2
0.2

Increases
B 2000 2000 0 0.00 0/1000=0
C 3000 2800 200 0.07 200/3000=0.07
D 4000 3600 0.2
400 0.10 400/4000=0.1

MP
0 0.2
0.10

APS =
Saving//Disposable
income
Points Yd C MPC Savings MPS APC APS

A 100 1200 -200 1.2 -0.2

0
B 200 2000 0.8 0 0.2 1.0 0
0
C 300 2800 0.8 200 0.2 0.93 0.07
0
D 400 3600 0.8 400 0.2 0.90 0.10
0

12-14
Determinants of Planned Consumption and
Planned Saving (cont'd)

 Some relationships
 Average propensity to consume and average
propensity to save must sum to 100% of total
income. (APC + APS = 1)
 Marginal propensity to consume and marginal
propensity to save must sum to 100% of the
change in income. (MPC + MPS = 1)

12-15
Prepared by:
Group 1
Kim Clarenson Maneja 
Pearlie Adell Salmorin 
Abigail Buenaventura 
Karla Marie Umandap 
Jathniel Landicho 

12-16
Thank you.
Godbless.
12-17