Chapter 13: Consumption and Saving

Comprehensive vocabulary flashcards reviewing key definitions, formulas, microeconomic foundations, consumption shifters, and saving motives from Chapter 13.

Consumption

Household spending on final goods and services, which forms the single largest component of GDP (accounting for approximately two-thirds of GDP).

Consumption Function

A curve plotting the level of consumption associated with each level of income; it slopes upward because higher income leads to higher consumption spending.

Marginal Propensity to Consume (MPC)

The fraction of each extra dollar of income that households spend on consumption, represented as $\frac{\text{Change in consumption}}{\text{Change in income}}$, which determines the slope of the consumption function.

Saving

The portion of income set aside rather than spent on consumption in a given period, calculated as $\text{Savings} = \text{Income} - \text{Consumption}$.

Dissaving

Consuming an amount in excess of income during a given period (negative saving), which must be financed by withdrawing money from savings or by borrowing.

Net Wealth

The total amount by which a person's assets exceed their debts.

Stock vs. Flow (in Savings)

The distinction where accumulated savings (wealth) is a stock measured at a point in time, while new saving, consumption, and income over a period are flows.

The Rational Rule for Consumers

A principle stating that a consumer should consume more today if the marginal benefit of a dollar of consumption today is greater than or equal to the marginal benefit of spending a dollar plus interest in the future.

Consumption Smoothing

Maintaining a steady path of consumption spending over time by reallocating spending from periods of plenty (low marginal benefit) to periods of poverty (high marginal benefit).

Permanent Income

An individual's best estimate of their long-term average income over the course of their lifetime.

Permanent Income Hypothesis

The macroeconomic theory that consumption is driven primarily by permanent income rather than current income, meaning fluctuations affect consumption only if they alter permanent income.

Credit Constraints

Limits imposed on how much an individual can borrow, typically occurring when loans cannot be backed by collateral.

Collateral

An asset that a financial institution or lender can seize if a borrower fails to keep up with loan repayments.

Hand-to-Mouth Consumers

Consumers who spend their income immediately as they receive it, possessing a marginal propensity to consume equal to $1$ and basing consumption on current income rather than permanent income.

Movement Along vs. Shift of the Consumption Function

A change in income produces a movement along the consumption function, whereas changes in non-income factors shift the entire curve upward or downward.

Consumption Shifters

The four macroeconomic factors that shift the consumption curve at any given income level: real interest rates, expectations, taxes, and wealth.

Disposable Income

After-tax income; reductions in taxes increase disposable income and shift the consumption function up, whereas higher taxes shift it down.

Precautionary Saving

Saving undertaken to prepare for unexpected financial emergencies, such as job loss or medical crises, typically recommended to equal $3$ to $6$ months of living expenses.

Bequest Motive

A motive for saving in which wealth is accumulated during life specifically to be passed on after death as an inheritance for children or a cause.