Chapter 5 - Consumption and Savings.pptx

Chapter 5 - Consumption and Savings

1. CONSUMPTION & SAVINGS

2. Economic Income Which is earned through economic activities. National Income – Reflected in the value of production. NI = GNP Personal Economic Income – which the firms pay to the households in exchange for factor contributions.

3. BASIC CONCEPTS OF CONSUMPTION

4. Consumption Household Consumption Directly satisfies human wants Business Consumption I ndirectly inasmuch as business activities provide the households with economic income to meet consumption expenditures as periodic payments for society’s current consumption of social goods. It is the act of using goods and services to satisfy human wants. In a broad sense, it is not the monopoly of households since businesses and the government also use goods and services to attain some ends. Expenditures on Capital Goods – serves as pre-payments of long-run consumption since durables are gradually consumed and repeatedly used over a long period.

5. THE CONSUMPTION FUNCTION

6. Consumption & Income National or Factor Income – its determinant is Personal or Household Consumption. Y + C Where: Y Factor Income Borrowings from the economy’s stock of savings C = Change in 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 income.

7. The Multiplier Concept Multiplier – It is the process of generating income through the circular flow exchange between the households and the firms. Marginal Propensity to Consume (MPC) – Consumption Factor 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.

8. The Following E quations I llustrate: Y = M = = MPS + MPC = 1 Where: M = Multiplier Coefficient (MPC) = Marginal Propensity to Consume MPS = 1 – (MPC) = Marginal Propensity to Save   S = i I = Y – C Y = i + C M = Where: S = Aggregate savings from currently generated income i = Inflow  

9. Consumption and Savings Dissavings /Net Borrowings Income < Consumption Net Savings Income > Consumption

10. Factors of Consumption Taste or Preference It depends on how the product satisfies one’s desires. A change in collective attitude can change aggregate taste or preference, consumption, and marginal propensity to consume. Reasons: Duesenberry’s Relative Income Hypothesis – the difference in consumption behavior could be explained by the difference in income level relative to what one is accustomed to. It may vary across different racial, ethnic, age, and occupational groups. Common Mentalities: Gaya – gaya System – One’s consumption is influenced by the demonstration of others. Colonial Mentality – there is a standing bias for goods marked “imported” which is also associated to economic status .

11. Population Size – An increase in household size with income and other factors as constant may decrease the propensity to consume and increase savings at the expense of non-essential items in the consumption basket. Income – Income re-distributed in favor of those with higher propensity to consume increases the level of aggregate consumption assuming other factors as constant. Price Level – Individual product demand is inversely proportional to price due to the change in purchasing power and substitution with other products. Innovation and Promotion – They can expand the line of consumers’ choice and extend the influence of demand factors on consumption and propensity to consume income. Factors of Consumption

12. Engel’s Law and the Compositional Change in Consumption Expenditure Ernest Engel – A German economist in the 19 th century who found a relation between the level of family income and the composition of its consumption spending. The Engel’s Law implies that changing the relative importance of items in the consumption basket depends on how consumers spend additional income. Spending more of additional income for higher needs like education increases their share in total consumption and income at the expense of essential items like food which follows the opposite trend. and At the expense of:   Where: = Consumption of non-essential items = Consumption of essential items C = Consumption of all items y = Income = Change