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Thread: Economics: Consumption Functions and Savings Functions?

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    Question Economics: Consumption Functions and Savings Functions?

    Could someone please explain consumption and saving functions +how to calculate them please? My teacher only vaguely explained them in class...

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    Re: Economics: Consumption Functions and Savings Functions?

    Assume we are in a world where we either spend on consumption goods/services or save.
    ie. Total Income (Y) = Total Consumption (C) + Savings (S)

    Consider the consumption component (C). There is a fixed component and a variable component which is dependent on our income.
    - The fixed component is called autonomous consumption (C0) which represents what we need to consume irrespective of what our income is. This includes food, rent, bills etc. Effectively it is our consumption when our income is 0.
    - The variable component depends on our income through our marginal propensity to consume (MPC). MPC is basically the proportion I would spend out of every extra dollar I earn. For simplicity, we assume MPC does not change.

    Thus we have:
    Consumption (C)= Fixed component + variable component
    = autonomous consumption (C0) + MPC * Income (Y)

    To derive the savings function, we simply use the first equation at the top (ie. what we didn't spend we shall save) to get:
    Saving (S) = Y - C
    = Y - C0 - MPC*Y = -C0 + (1-MPC)*Y = -C0 + MPS*Y
    Note that MPS represents the marginal propensity to save, and that the proportion we didn't spend of our extra dollar is saved (ie. MPS+MPC=1).
    Last edited by deterministic; 12 Mar 2011 at 12:06 PM.

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    Junior Member animeiswild's Avatar
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    Re: Economics: Consumption Functions and Savings Functions?

    Consumption:
    C=Co+cY
    Savings:
    S=-Co+sY

    Consumption:
    Co= autonomous consumption (autonomous:independent of income)
    So if C=80+0.8Y
    Co=80=autonomous consumption (survival expenditure when Y=0)
    c=MPC=0.8
    Y=level of income

    Saving:
    so if C=80+0.8Y
    -Co=autonomous saving=-80
    s=MPS=(1-0.8)=0.2
    Therefore S=-80+0.2Y

    MPS+MPC=1

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    Re: Economics: Consumption Functions and Savings Functions?

    Thank you to you both!

    Just to check I get it, so if the autonomous consumption is essentially when our income is 0, then that would make our autonomous saving always the negative of our autonomous consumption? So if the consumption function is e.g C=20+0.5 Y then our savings function would be S=-20+0.5Y (becaue our income which is MPC + MPS always has to equal one right?)
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    Junior Member animeiswild's Avatar
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    Re: Economics: Consumption Functions and Savings Functions?

    Yep, you got it!

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    Re: Economics: Consumption Functions and Savings Functions?

    ^Thank you so much
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