CONSUMPTION

AND SAVINGS
PRESENTED BY:
Cheryl Anne Mae Egay
Gwyneth Rancapero
Jasline Mejos

PASS COLLEGE | 2024

 ECONOMIC INCOME
_

Which is earned through economic activities.

›National Income - Reflected in the value of
production.
NI = NNP - Indirect business taxes
›Personal Economic Income - which the firms pay to the
households in exchange for factor contributions.

6
 CONSUMPTION

Consumption is the act of using goods and services

to satisfy human wants. In a broad sense,
consumption is not the monopoly of households
since businesses and the government also use
goods and services to attain some ends
 CONSUMPTION

Consumption refers to the use of goods and

services by households. It includes all spending on
necessities (like food, housing, and healthcare) and
non-essential items (like entertainment and luxury
goods).
 IMPORTANCE OF
CONSUMPTION
Economic Growth- Consumption is a key driver of economic
growth. When people spend money, it stimulates production
and creates jobs.
Quality of life- Consumption allows individuals to meet their
basic needs and improve their quality of life through access to
various goods and services.
Budgeting - Monitoring consumption helps in budgeting and
ensures that spending aligns with income, preventing debt
accumulation.
 SAVINGS

Savings refer to the portion of income that is

not spent on immediate consumption but is
set aside for future use. This can include
money kept in savings accounts, investments,
retirement funds, or even cash reserves.
 IMPORTANCE OF SAVINGS
Financial Security: Savings provide a financial cushion
against unexpected expenses or emergencies.
Wealth Building: Consistent saving allows individuals to
accumulate wealth over time, which can be used for
significant purchases, investments, or retirement.
Goals Achievement: Savings can be used to achieve
specific financial goals, such as buying a house, funding
education, or starting a business.
 THE CONSUMPTION
FUNCTION
The consumption function is an economic formula that measures the relationship between
income and total consumption of goods and services in the economy. The consumption
function was introduced by John Maynard Keynes.
1. CONSUMPTION AND INCOME - its determinant is Personal or Household
consumption.
Initially, the economy dissaves by borrowing from
its stock of savings to meet current consumption
needs in the absence of income. In realistic terms,
this can mean that poor families spend more than
what they earn by borrowing from the rest of
society which results in aggregate consumption that
exceeds aggregate.
Consumption and Savings

Dissavings/Net Borrowings
Income < Consumption

Net Savings
Income > Consumption
Example:
Suppose the total income(Y) of an economy is ₱10,000. However, households are
borrowing from savings to spend more than they earn. Let’s say the households borrow
₱2,000 to meet their consumption needs.
We also know that there is a change in consumption (AC), where households increase their
spending by ₱500 more than before.
Given the formula: [ Y = C + AC ]
Where:( Y = 10,000 )(Total income)( C = 2,000 ) (Amount borrowed)(AC =500)(Change in
consumption)

Using the formula:

[ 10,000 = 2,000 + 500 ]
This means that out of the total income of ₱10,000, households have borrowed ₱2,000 to
meet their current consumption needs. The change in consumption (AC) adds another
₱500. So, in this economy, people are spending ₱2,500 more than the income they earn,
showing how borrowing can lead to aggregate consumption that exceeds income. This
results in dissaving, where the consumption is higher than the income generated.
2. MULTIPLIER CONCEPT
Multiplier - It is the process of generating income through the circular
flow exchange between the households and the firms.
a)Marginal Propensity to Consume (MPC) - Consumption Factor
b) Marginal Propensity to Save (MPS) - Savings Factors
Multiplier Coefficient- It measures the average number of times
every peso of inflow circulates and change hands in the system as
income.
It measures the income generated from every peso of inflow which
when multiplied to the total inflow yields aggregate income.
It depends on the fraction of every additional income generated in
the exchange that flows out of the system as savings.
In *The General Theory of Employment, Interest and
Money* (1936), John Maynard Keynes discusses the
relationship between income and consumption through
his concept of the **consumption function**. According
to Keynes, as personal income increases, consumption
also increases, but not at the same rate. This is known as
the **marginal propensity to consume (MPC)**.
 MARGINAL PROPENSITY TO
CONSUME
The Marginal Propensity to Consume (MPC) refers to how sensitive consumption
in a given economy is to unitized changes in income levels. MPC as a concept
works similarly to Price Elasticity, where novel insights can be drawn by ooking at
the magnitude of change in consumption as a result of income fluctuations.
Where:
Change in consumption - Refers to the change in consumption (of a good,
service, or general consumption in an economy) resulting from changes in
income, expressed in percentage terms.
Change in income - Refers to the change in income levels of consumers,
expressed in percentage terms.
MPC is expressed as an absolute value.
 TYPES OF MPC

1. MPC GREATER THAN 1

2. MPC EQUAL TO 1
3. MPC LESS THAN 1
FACTORS THAT DETERMINE THE
MARGINAL PROPENSITY TO
CONSUME
1. INCOME LEVELS
2. TEMPORARY/PERMANENT
3. INTEREST RATES
4. CONSUMER CONFIDENCE
MARGINAL PROPENSITY TO SAVE

THE MARGINAL PROPENSITY TO SAVE (MPS) IS THE FRACTION

OF AN INCREASE IN INCOME THAT IS NOT SPENT AND
INSTEAD USED FOR SAVING.

FORMULA:
APPLYING THE MULTIPLIER EFFECT
THE MULTIPLIER CONCEPT CAN BE USED ANY SITUATION WHERE THERE IS A
NEW INJECTION INTO AN ECONOMY. EXAMPLES OF SUCH SITUATIONS
INCLUDE:
WHEN THE GOVERNMENT FUNDS BUILDING OF A NEW MOTORWAY
WHEN THERE IS AN INCREASE IN EXPORTS ABROAD
WHEN THERE IS A REDUCTION IN INTEREST RATES OR TAX RATES, OR
WHEN THE EXCHANGE RATE FALLS.
THE DOWNWARD OR 'REVERSE' MULTIPLIER: A WITHDRAWAL OF INCOME
FROM THE DOWNWARD
CIRCULAR FLOW WILL LEAD TO A DOWNWARD MULTIPLIER EFFECT.
THEREFORE, WHENEVER THERE IS AN INCREASED WITHDRAWAL, SUCH AS A
RISE IN SAVINGS, IMPORT SPENDING OR TAXATION, THERE IS A POTENTIAL
DOWNWARD MULTIPLIER EFFECT ON THE REST OF THE ECONOMY.
MULTIPLIER FORMULA:
 MULTIPLIER COEFFICIENT

FORMULA:
3. CONSUMPTION AND SAVINGS

• INCOME = CONSUMIPTION + SAVINGS

• THE LARGEST PART OF TOTAL SPENDING IS CONSUMPTION.
• IF INCOME INCREASES, CONSUMPTION ALSO INCREASES BUT
NOT AS QUICKLY AS INCOME.
• IF INCOME INCREASES, SAVINGS ALSO INCREASE BUT AT THE
HIGHER RATE THAN INCOME.
4. GRAPHICAL
AND TABULAR
ILLUSTRATION

X-AXIS
- INCOME
Y-AXIS
- CONSUMPTION
 FACTORS OF CONSUMPTION
FRAMEWORK
TASTE AND PREFERENCE
POPULATION
INCOME
PRICE LEVEL
INNOVATION ANDPROMOTION
ENGEL’S LAW AND THE COMPOSITIONAL
CHANGE IN CONSUMPTION EXPENDITURE
THANK YOU!