BUSINESS

ECONOMICS

TO:
SIR TOUQEER
Presented by : Aiman
Hooia
Fiza
Contents
Consumption

Consumption Function

Saving Function

Marginal Compensity to consume

Marginal prempensity to save

Determinants of consumptions
Topic:
Consumption
Consumption Function

Presented by :
Aiman
 ■ It is the process in which markets and consumers exchange, use
and destroys goods and services. 
■ Consumption can be termed as the satisfaction of an individual’s
needs and wants by using goods or services.
■ For example:
A teenager using social media platforms to connect with
friends and family online is a way of consumption. 
Consumption:
 ■ Consumption is also be defined as the destruction of utility.
■ Consumption also involves expenditure of income. And it can be
direct or indirect. It is direct when the product satisfies directly or
immediately.
■ For Example:
An apple on its own has a utility, but when a man eats the apple, it
changes itsform and is no longer has its original utility intact, thus the
Consumption: man is said to have destroyed its utility in the act of eating it again
termed as consumption. 
 These factors include 
 Disposable income
What Affects
  Taxes, 
Consumption?
 Real income,
  Economic confidence,
  Savings preference:
 • Disposable Income:
Disposable Income is the money that an individual
has left after accounting or paying taxes. The more
disposable income someone has, the more they normally
consume.
What Affects  Taxes:
Consumption?
The amount of income tax that people pay determines
how much they will have left to spend. More taxes  means
people have less money to spend, which means
consumption drops
 • Real Income:
The amount of real income consumers have determines
how much they are able to spend. More real income is met
by increased consumption.
• Economic Confidence:
People's confidence in the economy is a critical factor in
What Affects their spending habits. When they have confidence in the
Consumption? economy, they are certain about the future, which results in
them spending more money on consumption.
• Savings Preference:
A desire to save is met by less consumption. When people
prefer to save money rather than spend, they essentially
consume less.
 ■ In economics, the consumption function describes a relationship
between consumption and disposable Income. 
■ The consumption function shows the level of consumer
spending as it relates to disposable income.
■ The consumption function formula is C=c+bY C = c + b Y
Consumption
■ where: C is the total consumption.
Function ■ c is the basic consumption.
■ b is MPC.
■ Y is income.
  The classic consumption function suggests consumer spending is
Consumption wholly determined by income and the changes in income. If true,
aggregate savings should increase proportionally as gross
Function domestic product (GDP) grows over time. 
  The consumption function is represented as:
 ​C = A + MD

Calculating the  where:

 C=consumer spending
Consumption
 A=autonomous consumption
Function
 M=marginal propensity to consume
 D=real disposable income​
Topic:
Saving Function

Marginal Compensity to
consume

presented by :
Hooria
DREAM DESIGN BUILD
 ■ Saving is that part of income which is not spent on current
consumption.
■ The relationship between saving and income is called
saving function.
Saving ■ Simply put, saving function (or propensity to save) relates
Function the level of saving to the level of income.
■ It is the desire or tendency of the households to save at a
given level of income. 
 ■ Saving can be negative (-) at zero or low level of income.
■ As Income increases, savings also increase but more than
the increase in income Remember, saving is residual
Saving income of households that is left after consumption.
Function ■ Algebraically:
■ S = Y-C
 ■  There is direct relationship between income and saving,
For Example:
If income increases, saving also increases but by less than
increase in income. It means as income increases, proportion
of income saved increases.
Relationship ■ At lower level of income, saving is negative. In the initial
between stages when there is very low level of income, consumption
Income and expenditure is more than income leading to negative saving.
Saving: For Example:
For instance, if income is, say, Rs 5,000 and consumption
expenditure is, say 6,000, then saving will be negative, i.e., -
1000 (= 5000 – 6000). It is called dissaving. Here average
propensity to save is negative.
  The proportion of an increase in income that gets spent on
consumption.
 MPC varies by income level.
Marginal  MPC is typically lower at higher incomes.
propensity to  MPC is the key determinant of the Keynesian multiplier, which
consume describes the effect of increased investment or government
spending as an economic stimulus.
 • Income levels.

 At low-income levels, an increase in income is likely to see a

Factors that high marginal propensity to consume; this is because people
on low incomes have many goods/services they need to buy.
determine the However, at higher income levels, people tend to have a
marginal greater preference to save because they have most goods
they need already.
propensity to
• Temporary/permanent. 
consume If people receive a bonus, then they may be more
(MPC) inclined to save this temporary rise in income. However, if
they gain a permanent increase in income, they may have
greater confidence to spend it.
  Interest rates.
A higher interest rate may encourage saving rather than
Factors that consumption; however, the effect is fairly limited because
determine the higher interest rates also increase income from saving,
reducing the need to save.
marginal  Consumer confidence.
propensity to If confidence is high, this will encourage people to spend.
consume If people are pessimistic (e.g. expect
unemployment/recession) then they will tend to delay
(MPC) spending decisions and there will be a low MPC.
Topics:

Marginal prempensity to save

Determinants of
consumptions

presented by :
Fiza
  Refers to The Proportion Of A Pay Raise That A Consumer
Saves Rather Than Spends On Immediate Consumption.
 Mps Can Be Used To Understand How Government
Marginal Spending And Investment May Influence Saving And What

Propensity to The Economic Impact Of The Spending And Investment

Might Be.
save  Mps Varies By Income Level.
 It Is Typically Higher At Higher Incomes.
Marginal
Propensity to
save
 MPS= dS / dY
MPS= marginal prosperity to save
ds = change in savings
Marginal dY = change in income
Propensity to  The marginal propensity to save is the fraction of an

save increase in income that is not spent and instead used for
saving.
 It is the slope of the line plotting saving against income.
Marginal
Propensity to
save
 The key determinants of consumption include
  income
 savings
Determinants Of  expectations
Consumption  changes in fiscal policy
 debt levels
 the availability of goods and services
 Income
 Income level is the most important
factor of consumption as it directly affects the spending
capacity of an individual or household. 
Determinants Of
 Income is derived from labor (in the form of salaries
Consumption or wages), capital (in the form of dividends or rent) or
remittances from abroad. 
 Disposable income is the average income minus
taxes. Its what helps households to buy things.
  Savings
The savings ratio is a big factor in economic activity.
When savings are low it could mean households are opting for
short-term consumption over long-term investment.
Determinants Of  Expectations
Consumption Consumption could increase if there is an
expectation of growth in income or household income. If
individuals are confident, they are more likely to spend now.
   Availability of goods or services

When goods or services are available in

abundance, it could lead to more consumption, while a crunch
in it can lead to a decline.

Determinants Of
Consumption
Thank you
Hope you Appriciate