Disposable Income ( DI ):
- Income after taxes or net income
2 Choices:
- With disposable income, households can either:
- Consume (Spend)
- Save (Not Spend)
Consumption:
- Household spending
- The ability to consume is constrained by:
- the amount of disposable income
- the propensity to save
- Do households consume if DI = 0?
- autonomous consumption
- dissavings
Savings:
- Household NOT spending
- The ability to save is constrained by:
- the amount of disposable income
- the propensity to consume
- Households do not save if DI = 0
MPC & MPS
Marginal Propensity to Consume (MPC)
- MPC = ⧍C/⧍DI
- % of every extra dollar earned that is spent
Marginal Propensity to Save (MPS)
- MPS = ⧍S/⧍DI
- % of every extra dollar earned that is saved
Multiplier are (+) when there is an increase in spending; (-) when there is a decrease
Calculating the Tax Multiplier
- When the government taxes, the multiplier works in reverse
- Money leaving circular flow
Tax Multiplier (Negative)
- - MPC / 1 - MPC
- - MPC / MPS
If there is a tax cut, then the multiplier is positive, more money in circular flow
Well-kept notes! However, I will like to point out somethings: (1)You titled this post "consumption and spending" which is incorrect because consumption and spending are basically the same thing, the actual title should be: "consumption and savings" because these are the two options you have when it comes to income, is either you consume or you save. (2) You only provided notes APC + APS, and left out MPC + MPS which are important because MPC gives the expected % of the change in DI that one will spend, and MPS the expected % of the change in DI that one will save.
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