Marginal Propensity to Save or Consume

AP Macroeconomics

Review from yesterday: Why more produced than is demanded? Firms experience a build-

up of inventories: More product is unsold and sitting in the warehouse

Firms respond by producing less and laying off workers

Output decreases and moves the economy toward the equilibrium level of output Y

Consumption Consumption can be represented by the

equation C = a + bY, where Y is income or output

b is the marginal propensity to consume (MPC), which shows the amount by which consumption will increase if income increases by $1

MPC = change in consumption/change in income

http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesianformulas.swf

Remember…

In the simplest of simple models, households have only 2 things that they can do with their income

Save

Consume

Income:

Money in the bank, money money in the bank…

Saving & Dissaving

Unit 3: Macroeconomics

Visual 3.3

We are technically in a state of “dissaving” when output and expenditure are below the equilibrium, and consumption exceeds income/output. Why could this phenomenon occur? When we don’t have income (and perhaps are unemployed) and are living off of our savings!

http://yadayadayadaecon.com/concept/saving/

Therefore…

If households have the choice to consume or save, the marginal propensity to consume plus the marginal propensity to save must equal 1.

MPC + MPS = 1

Tomorrow…

THE MULTIPLIER…

And now…

Some resources:

http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesiancross.swf

Works Cited

Economics of Seinfeld. Saving. http://yadayadayadaecon.com/concept/saving/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.