Economists care about income/spending:

• relationship with each other
• relationship to overall health of the economy
• relationship to/ effects on economic growth, inflation, recession, and business cycle

The Consumption Schedule:
- Reflects the direct consumption (C) -disposable income (DI) relationship

-Households increase their C as DI rises.
-Households spend a larger proportion, if their DI is small.
-Break-even income is when C=DI , which also means that households consume their entire income, but not to the point where they go in debt. At this point, the consumption schedule intersects the 45 degree line (the savings schedule intercepts the x-axis).

-When developing macroeconomic models, economists change their focus from consumption and disposable income to the relationship between consumption and saving and real domestic output (real GDP).

The 45 Degree Line:
- A reference line that bisects the the 90 degree angle formed by the y-axis and x-axis of the graph.
- At each point on the 45 degree line,C=DI.
- The vertical distance between the 45 degree line and Consumption line measures either savings (when C line is below the 45 degree line) or dissavings (when C line is above the 45 degree line).
-Dissaving occurs when household consume more than its DI, indicating that the household borrowed money or spent accumulated wealth.
-Dissaving usually occur with households of lower income.

The Saving Schedule:
Savings = Disposable Income - Consumption
Savings are essentially the portion of your income you don't consume.
Dissavings= consuming more than the available income either by liquidating accumulated wealth or borrowing money.
If households consume a smaller and smaller proportion of DI as DI increases, then they must be saving a larger and larger proportion.

Average and marginal propensities

• APC and APS:
  • Definitions:
    • Average Propensity to Consume (APC): total percentage of DI consumed
    • Average Propensity to Save (APS): total percentage of DI saved
  • APC = Consumption/Income
    • the fraction of total income that is consumed
      
  • APS = Saving/income
    • the fraction of total income that is saved
      
  • APC+APS= 1
    • Every leftover dollar not spent is saved
      
• MPC and MPS:
• • MPC (marginal propensity to consume) = change in consumption/change in income.
    • the proportion of changes in income consumed.
      
  • MPS (marginal propensity to save) = change in saving/change in income.
    • the proportion of changes in income saved.
  • MPC + MPS =1
    • The sum of the MPC and the MPS for any change in DI must always be 1 becuase every leftover dollar not spent is counted "saved".
      
    *Note that if a consumer's income changed by a certain percentage, their propensity to spend does NOT always change in accordance with it.

MPC and MPS as Slopes

• The MPC and MPS are the numerical values of the slopes of the consumption and savings schedule, respectively.

Nonincome determinants of consumption and saving:

• Wealth = value of real assets (i.e. houses, land) and financial assets (i.e. cash, savings, stocks, bonds)
  • When wealth increases, households increase spending and reduce savings
    • Shifts Consumption schedule upward and Supply schedule downwards
    • Opposite occurs when wealth decreases
• Expectations about future prices and income
  • Expectations of rising prices in the future will cause an increase in consumption and decrease in saving in the present.
    • Shifts Consumption schedule upward and Saving schedule downward
    • Opposite occurs, when there are expectations of a recession and lower income in the future
• Real Interest Rates
  • When real interest rates fall, households borrow more, consume more, and save less.
  • When real interest rates climb, households borrow less, consume less, and save more.
  • These effects on consumption and saving are very modest. They mainly shift products bought on credit.

• Household Debt
  • When consumers as a group increase household debt, they can increase current consumption at each level of DI.
    • Household debt is a constant proportion in DI.
    • Greater household debt means greater borrowing.
      
    • Increased borrowing shifts the consumption schedule upward.
    • Reduced borrowing shifts consumption schedule downward.