Although many other factors help to determine the amount of consumption and saving, disposable income is easily the most important. Furthermore, any determinant of consumption must also be a determinant of saving: By definition, any amount of disposable income that is not spent must be saved. Likewise, any fraction of a change in disposable income that is not spent must be saved. That is, C + S = DI and MPC + MPS = 1.
|
Exploration: How are disposable income, consumption, and saving related? |
The consumption schedule graphically illustrates the relationship between consumption and disposable income (Listed as C and Y, respectively, in the table.) While the fraction of disposable income that is spent typically declines as income increases, it is usually assumed that consumers spend a constant fraction of any change in income. That is, the consumption schedule is linear with a slope less than one.
The graph shows a typical consumption schedule and its corresponding saving schedule. Initially, consumers are assumed to spend $1250 when disposable income is zero (“autonomous consumption.”) The MPC is set to .75, indicating that consumers spend 75% of any change in their disposable incomes (and save 25%). Combined, these two imply that consumers will spend all of their disposable income when the latter is at $5000, as shown in the graph. At this level of income, saving must be zero.
To use the graph, click and drag the blue diamond to change the level of disposable income; the corresponding values for consumption and saving will be updated in the chart. Drag any of the scroll buttons to change the values of the MPC, MPS, or autonomous consumption.