Study Notes

1) How does income level influence decisions to save and

safe?
-As income rises, people tend to save a higher portion of income
-Because, less portion of income will be spent on essential items
-Though as income rises, consumption rises too, just at a slower rate
than savings
-Hence, Average Propensity Consumption falls
2) What is Marginal propensity Consumption?
-The proportion of each extra dollar of income spent on consumption
=Change in Consumption/Change in Income
3) What is Marginal Propensity Saving?
-The proportion of each extra dollar of income, saved
-MPC + MPS = 1
4) How do the two Ratios relate to the entire economy?
-The equation works for the entire economy, hence, in general
terms, as the income rises, the overall savings should also rise
5) What is the consumption function?
-The graph of the relationship between income and consumption of
an individual or the economy
6) How does Age influence the decision to spend and save?
-If low income is expected in the future, then individual will tend to
save a larger proportion of the income
-Younger population earns a lower income; hence spend most of
their income

-Middle Age Earn a higher income but start to save for retirement
and later life
-Retirement Spend the savings and rely on govt for income
-Individual on higher income tend to save more for past debt and
retirement
-Hence, as a person grows older, the avg. propensity to consume
drops and then rises after retirement
-Referred to as the Life-cycle theory of consumption
7) Calculate the Following:
Scenario
Income - $1000 Consumption - $700
Consumption - $ 800
a) APC 800/1200 = 0.66
b) APS 400/1200 = 0.33
c) $400
d) $200

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