ECS 1601 Study Notes

ECS 1601 Study Notes Relationship between consumption and income Figure 18-2 Autonomous and induced consumption C C=C₁ + cY C₁ 0 Y The shaded area represents autonomous consumption while the remainder of the area under the consumption function represents induced consumption. Autonomous consumption is independent of the level of income, while induced consumption increase as income increases. Autonomous consumption changes as result of a change in one of the non-income determinants of consumption Non-income determinants of consumption(the factors that determine autonomous consumption)  Distribution if income  The age distribution of the population  Consumers holdings of financial assets  Availability and cost of credit The relationship between consumption and income Consumption increases as income increases. Consumption is positive even if income is zero (there are non-income determinants – people will spend savings or use credit if their income is 0. This is the autonomous consumption). When income increases, consumption increases but the increase in consumption is less than the increase in income – part of the additional income is saved There are two parts of consumption spending: an autonomous part which is independent of income, and an induced part which is determined by income © 2017 Together We Pass. All rights reserved. pg. Autonomous Consumption Induced Consumption 1 c The relationship between consumption and saving  ALL income is either saved, or spent  If S is savings then Y = C + S  Saving is also thus not spending  The marginal propensity to save (s) is the proportion of an increase in income that is saved  s + c must equal = 1  e.g. if c = 0,75, then s = 0,25  as s is what is not c (savings is that which is not spent) it follows that the factors that determine aggregates saving are the same as that affect aggregate consumption (anything that increases c decreases s) S = Y – C = Y – (C + cY) since C = C + cY