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95- Consumption and Saving Function | Keynes law of Consumption | MPC |MPS | Shift in Consumption - YouTube
Channel: Easy Learning Economics
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hey guys welcome to easy learning
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economics i'm dr carol in this lecture
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we shall discuss the consumption
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function and saving function in this
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lecture we shall discuss the
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mathematical and graphical expression of
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consumption function what is the key in
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psychological law of consumption and
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marginal propensity to consume
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what do you mean by marginal propensity
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to save
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marginal propensity to consume and slope
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of consumption function
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what does it mean the marginal
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propensity to save and slope of saving
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functions what are those factors which
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causes the shift in consumption function
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and consumption and saving functions
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together
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so in this lecture we shall cover all
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these things
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what is consumption
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the use of resources to satisfy needs
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and wants is called consumption what are
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the components of aggregate expenditure
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the components of aggregate expenditure
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are the consumption expenditure
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investment expenditure government
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expenditure and net export expenditure
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but here we shall discuss only the
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consumption expenditure one of the
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component of the aggregate demand
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national income or national output of
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gdp the cost c plus g
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plus i plus nx it means that c stands
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for consumption g for government
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expenditure
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i stands for the investment nx means net
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exports
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our aggregate demand is the function of
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the consumption government expenditure
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investment and net exports but here we
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shall only discuss the
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c
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that means consumption which is the
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component of aggregate demand or
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aggregate expenditure there is a
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positive
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and stable relationship between
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consumption and income both for
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household in the economy as the income
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goes up the consumption goes up
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as the income decreases the consumption
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decreases to determine how much
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household spend on consumption of goods
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and services
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it basically depends upon the disposable
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income
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and income depends upon how much is
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produced
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whereas saving is the difference between
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disposable income and consumer spending
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disposable income means the income which
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remains with consumer after paying his
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taxes towards the government
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what is the keen psychological law of
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consumption keen's law of consumption
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has three
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suppositions
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kings state that an increase in income
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will lead to an increase in consumption
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and saving
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that total output is function of
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consumption plus saving with an increase
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in income consumption increases but
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increase in consumption is less than
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increase in income
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so the marginal propensity to consume
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means the proportion of the additional
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income which is spent on the purchase of
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goods and services is always less than
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one what is not consumed is saved gdp is
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equals to consumption plus saving as the
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income rises the consumption goes up and
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also on the other sides
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the saving increases
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because with the increase in income the
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consumer is not spending the whole
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income on the purchase of goods and
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services but something is saved so
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always remember that the marginal
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propensity to consume plus marginal
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propensity to save is always equals to
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one when income y grows
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disposable income rises
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and consumer buy more goods from
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expenditure size consumption plus
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investment is equals to output real gdp
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or equals to national income this is the
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output of gdp income is equals to
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consumption
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plus investment
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this is from expenditure side this is as
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we found in this equation
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or the income is equals to consumption
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plus saving by subtracting the
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consumption from both sides saving must
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be calls to investment if you want to
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learn more about that that how the
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sharings are equal to investment in two
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sector economy you can watch my video
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and the link is in description box
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so what is the importance of consumption
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function in daily life the consumption
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function plays an important role in
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macroeconomic analysis
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and designing economic policies because
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patterns of consumption affect the
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economy as a whole
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both in the short-term and long-run
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period
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what is the consumption function
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household decides how much to consume
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and how much to save at their given
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level of disposable income because
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consumption depends on the disposable
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income consumption function basically
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shows a positive relationship between
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income level in the economy and amount
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household plans is paying on consumption
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while keeping other non-income
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determinant of consumption constant
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non-income determinant of consumption
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are that
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net wealth prevailing price level
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interest rate and expectations about
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price level are held constant because
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these are the factors which affects the
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consumption consumption is dependent
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variable
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whereas disposable income is independent
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variable the difference between
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disposable income and consumption is
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used to define consumption schedule this
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is the mathematical expression of
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consumption function that consumption
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function is equals to a plus b y minus
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nt
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a means autonomous consumption
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autonomous consumption means the
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consumption which is independent of the
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level of income beta means the slope or
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the change in consumption with increase
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in disposable income
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so here y
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y means the income and nt means taxes
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towards the government
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it means the consumption function is
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equals to a plus b y minus n t so a plus
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b d i it means the d i d i means the
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disposable income
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here
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c means consumption expenditure
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a means autonomous consumption
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and y means household income
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and nt means net taxes
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and di means disposable income and beta
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is the coefficient represent the
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marginal propensity to consume
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real consumption spending is measured on
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y-axis
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real disposable income in billion dollar
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is measured on x-axis
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when
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the income rises from 600
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to 650
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causes the consumptions to rise
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by
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500 to 540 it means the 50 billion
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increase in income
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leads to rise in consumption by 40
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billions and 10 billions are saved at
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point a is the income increases from 650
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billion dollars to 700 in it means a 50
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billion dollar increase in income
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in real gdp causes the economy to make
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an expenditure from
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540 to 580
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billion dollar at point b
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likewise as income increases is from
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700 to 750 the expenditure increases
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from
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580 to
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620 billion dollars
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as the income increases from 750 to 800
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the consumption increases also likewise
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at point e by joining all these point we
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get a curve that is c this is the
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consumption curve
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marginal propensity to consume and save
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mps
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marginal propensity to consume is the
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friction of additional income that is
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spent on consumption minor propensity to
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consume means the change in consumptions
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divided by change in disposable income
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here delta means change
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minor propensity to consume is less than
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1 and it remains stable over time
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it is assumed that marginal propensity
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to consume does not change with a change
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in the level of income if marginal
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propensity to consume is low the
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consumption curve will be flatter
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if model propensity to consume is high
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the consumption curve will be steeper
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and if marginal propensity to consume is
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hundred percent
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the consumption curve will represent the
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45 degree
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line
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my propensity to save is the friction of
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additional income that is saved it means
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the marginal propensity to save means
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the change in saving divided by change
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in disposable income minor propensity to
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save is less than 1
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but always remember remember always that
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marginal propensity to consume plus
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minor propensity to save
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is equals to 1 marginal propensity to
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consume and slope of consumption
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function
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the slope of straight line is equals to
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vertical distance between any two points
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divided by the horizontal distance
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between
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those points
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or the slope of consumption is basically
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the change in consumptions divided by
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change in disposable income which equals
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the marginal propensity to consume
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the marginal propensity to consume means
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the change in consumptions divide by
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change in disposable income with
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increase in income of 50 billion the
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consumption increases by 40 billion it
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means the change in consumption is 40
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divided by 50
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so the marginal propensity to consume is
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0.8
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so you can see here in the graph that
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the real consumption is pending
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and real disposable income has been
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measured on y-axis and x-axis
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respectively
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as the income increases from 600
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to 650
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the consumption increases from
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500 to 540 and likewise as the income
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increases the consumption increases
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this is the slope
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slope is basically a change in
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consumption rise over run marginal
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propensity to consume a slow so it means
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the slope is nothing more than an
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increase in consumption divided by an
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increase in income minor propensity to
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save and slope of saving function
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saving function so first of all what is
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saving saving is the difference between
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income and consumption
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it means the part of income that is not
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spent on consumption of goods and
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services is called saving the
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relationship between saving and level of
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income in the economy and other things
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that includes net wealth price level
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interest rate and expectations about
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price change remains same
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so these are the factors that affect the
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savings so these are held constant
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the saving function is minus cx plus 1
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minus by d
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minus ca is autonomous saving that is
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negative
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because person must borrow to survive
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and 1 minus beta is a marginal
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propensity to save and beta is the
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marginal propensity to consume
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the slope between any two points on the
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saving function minus the change in
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saving divided by the change in income
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so minor propensity to save is equal to
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change in saving divided by change in
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disposable income the delta represent
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change here
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if income rises by 50 billion dollar
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that the consumption increases by
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40 billion dollar it means out of
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increased income that 10 billion dollars
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are saved so the change in saving is 10
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divided by 50 so the marginal propensity
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to save is a 0.2 so saving function is
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derived by subtracting consumption from
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income
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so what are those factors which causes
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the shift in consumption function as you
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can see here this is the real
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consumption and this is the real
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disposable income the initial
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consumption expenditure is c
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the consumption shift towards downward
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from c to c dash
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it means a downward consumption function
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such as from c to c dash can be caused
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by decrease in wealth and increase in
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the price level and unfavorable change
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in consumer expectations are an increase
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in interest rate causes the consumption
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functions to shift downward
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an upward shift that is from c to c
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double dash can be caused by an increase
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in wealth
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a decrease in price level
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a favorable change in consumer
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expectations or a decrease in interest
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rates so these are the factors which
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causes the consumption functions to
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shift inward or outward
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so what is consumption and saving
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function consumer spending and saving
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have been measured on y-axis and
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disposable income has been measured on
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x-axis
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and this is the s
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saving function is minus cf plus 1 minus
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beta
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yd at the low level of income total
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savings are negative or this savings
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because the consumption exceeds the
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income level
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here you can see this is the
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income that is equals to consumption
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this is the consumption
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at this point
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the consumption is greater than income
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at point e income and consumptions are
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equal
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where the savings are zero at this point
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the income is greater than consumption
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and as a result the consumption is less
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than income and savings are
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positive
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from here you can see that the saving
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starts to rise
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and consumption is less than income
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with an increase in income saving rises
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and the slope of saving function is
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marginal propensity to save
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according to kings the consumption and
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savings are positively related with the
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level of income
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non-income determinant of consumption
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and savings
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as we learned in the previous slides
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that the different factors like net
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wealth prevailing price level interest
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and expectations about price level
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affect the consumption as well as
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savings so these are held constant
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except these discussed factors other
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objective and subjective factor
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do affect the consumption and savings
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also
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like liquidity preference liquidity
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preference means the demand for money
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for precautionary motive transactions
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motive or speculative motive also
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affects the consumption
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fiscal policy with increasing tax rate
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decrease the consumption and monetary
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policy with increase in interest rate
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also affect the consumption and saving
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education level capital gain and losses
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credit availability consumer confidence
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social status
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protecting oldhood to provide financial
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safeguard to followers and untrained
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people by acquiring job etc also affect
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the consumption and savings this is all
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about the consumption and saving
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function i hope this will be helpful for
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you if you like this video please don't
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forget to subscribe thanks for watching
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