Functional relationship between saving and income.pptx

Saving as the function of income,

1. Savings are a function of Y . Symbolically, S = f(Y) If income increases, savings also increase, i.e If Y , then S , but less than increase in income. Saving Function 1

2. Saving is part of income which is not consumed, that is money taken out of the Y-stream because disposable income is either consumed or saved, i.e Y=C+S S=Y-C, Here, Y= disposable income 2

3. When Y is zero, consumption cannot be zero, consumers will have to borrow or use their past savings. Therefore, when Y is zero, S < 0. This is called Dissavings. As income increases, savings also increase. Finally, S = 0, and then S > 0. 3 Savings – Income relationship 15-May-24

4. 15-May-24 4 Savings Function C, S Y Y=C+S S = - a + sY (s=1-b) Sa Y 1 dissaving S < 0 S = 0 Savings > 0

5. Average Propensity to Save: APS = S/Y Savings function is given by: S =  a + sY Here, a is the savings level when Y = 0, and it is negative, and C > Y. When Y increases, C also increases but less than Y, and C = Y. At this point S = 0. At higher incomes, S increases, but less than income. So S/Y < 1, but positive. APC + APS = 1 15-May-24 5 Average Propensity to Save

6. MPS = ∆S/ ∆Y = rate of increase in S, due to increase in Y. S = - a + sY , MPS = dS / dY = s =1-b It is equal to the slope of the S-curve. On a straight line S-curve, MPS remains constant. MPC + MPS = 1, or MPS = 1 - MPC 15-May-24 6 Marginal Propensity to Save

7. Y C S APC = C/Y APS = S/Y MPC = ∆C/∆Y MPS = ∆S/∆Y 50 - 50 100 125 - 25 1.25 - 0.25 0.75 0.25 200 200 1 0.75 0.25 300 275 25 0.92 0.08 0.75 0.25 400 350 50 0.88 0.12 0.75 0.25 500 425 75 0.85 0.15 0.75 0.25 15-May-24 7

8. From the table it can be seen that: APC is > 1, when Y = 0, and falls as Y . APS is < 0, when Y = 0, and rises as Y . But it is always < 1. APC + APS = 1 MPC is constant, since the C-function is a straight line curve. MPC is the slope of the C-function. MPS is also constant, since the S-function is a straight line. MPS is the slope of the S-function. MPC + MPS = 1 15-May-24 8

9. Thankyou 9