![]() It is not the level of consumption divided by the level of disposable personal income. It is the change in consumption divided by the change in disposable personal income. It is important to note carefully the definition of the marginal propensity to consume. The Greek letter delta (Δ) is used to denote “change in.” The ratio of the change in consumption (ΔC) to the change in disposable personal income (Δ Y d) is the marginal propensity to consume The ratio of the change in consumption (Δ C) to the change in disposable personal income (Δ Y d). More generally, the slope equals the change in consumption divided by the change in disposable personal income. When disposable personal income ( Y d) rises by $500 billion, consumption rises by $400 billion. The slope of the consumption function tells us by how much. The relationship between consumption and disposable personal income that we encountered in Figure 13.1 "The Relationship Between Consumption and Disposable Personal Income, 1960–2010" is evident in the table and in the curve: consumption in any period increases as disposable personal income increases in that period. Department of Commerce, Bureau of Economic Analysis, NIPA Tables 1.16 and 2.1 (Novemrevision Data are through 3rd quarter 2010).įigure 13.2 "Plotting a Consumption Function" illustrates the consumption function. ![]() It can be represented algebraically as an equation, as a schedule in a table, or as a curve on a graph. The relationship between consumption and disposable personal income is called the consumption function The relationship between consumption and disposable personal income. The data suggest that consumption generally changes in the same direction as does disposable personal income. Real values of disposable personal income and consumption per year from 1960 through 2010 are plotted in Figure 13.1 "The Relationship Between Consumption and Disposable Personal Income, 1960–2010". GDP is a measure of total income disposable personal income is the income households have available to spend during a specified period. Note that disposable personal income and GDP are not the same thing. It seems reasonable to expect that consumption spending by households will be closely related to their disposable personal income, which equals the income households receive less the taxes they pay. It is important because, as McCulloch said, consumption is at the heart of the economy’s fundamental purpose.Ĭonsumption and Disposable Personal Income So, consumption is not just important because it is such a large component of economic activity. The factors that determine consumption thus determine how successful an economy is in fulfilling its ultimate purpose: providing goods and services for people. Goods and services are produced so that people can use them. Mc Culloch, A Discourse on the Rise, Progress, Peculiar Objects, and Importance, of Political Economy: Containing the Outline of a Course of Lectures on the Principles and Doctrines of That Science (Edinburgh: Archibald Constable, 1824), 103. McCulloch, an economist of the early nineteenth century, wrote, “Consumption … is, in fact, the object of industry.” J. Discuss two factors that can cause the consumption function to shift upward or downward.Compare the current income hypothesis with the permanent income hypothesis, and use each to predict the effect that temporary versus permanent changes in income will have on consumption.Explain and graph the consumption function and the saving function, explain what the slopes of these curves represent, and explain how the two are related to each other. ![]() zip file containing this book to use offline, simply click here. You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license.
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