10.1 The Income-Consumption and Income-Saving Relationships

What is the relationship between disposable income and consumption?

It's a direct (positive) relationship — as disposable income increases, consumption usually increases too.

How do economists define personal saving?

Saving is the part of disposable income that is not consumed. Formula: S = DI − C

What does the 45° line on a consumption graph represent?

It shows all points where consumption equals disposable income (C = DI) — meaning no saving or dissaving.

What does it mean when the consumption line is below the 45° line?

Households are saving part of their income.

What does it mean when the consumption line is above the 45° line?

Households are dissaving — spending more than their income, often by borrowing or using savings.

What is the Average Propensity to Consume (APC)?

The fraction of total income that is consumed. APC = C / DI

What is the Average Propensity to Save (APS)?

The fraction of total income that is saved. APS = S / DI

What is the Marginal Propensity to Consume (MPC)?

The fraction of a change in income that is consumed. MPC = ΔC / ΔDI

What is the Marginal Propensity to Save (MPS)?

The fraction of a change in income that is saved. MPS = ΔS / ΔDI

What is always true about APC and APS?

APC + APS = 1 — all income is either consumed or saved.

What is always true about MPC and MPS?

MPC + MPS = 1 — all changes in income are either consumed or saved.

What unusual trend occurred between 2019 and 2020 in the U.S.?

Disposable income increased, but consumption decreased — an inverse relationship due to COVID-19 fears.

Why did saving spike during the COVID-19 pandemic?

People were uncertain about the future, so they saved stimulus payments instead of spending them.

What happened to the savings rate in spring 2020?

It jumped from 7.6% to 33.8% of disposable income.

What happened between 2020 and 2021?

The normal positive relationship between income and consumption returned as confidence improved

What does the consumption schedule show?

Planned consumption at various levels of disposable income.

What does the saving schedule show?

Planned saving at various levels of disposable income.

What is break-even income?

The income level where C = DI and S = 0 — no saving or dissaving.

What is the slope of the consumption schedule?

It equals the MPC — in this case, 0.75.

What is the slope of the saving schedule?

It equals the MPS — in this case, 0.25.

What does the 45° line represent in a consumption graph?

It shows all points where consumption equals disposable income (C = DI) — meaning households spend all their income and save nothing.

What does it mean when the consumption line is below the 45° line?

Households are saving part of their income. The vertical gap between the 45° line and the consumption line = amount saved (S).

What does it mean when the consumption line is above the 45° line?

Households are dissaving — spending more than their income. The vertical gap = amount dissaved.

What is the break-even point on the graph?

It’s where the consumption line crosses the 45° line — meaning C = DI and S = 0.

How do you calculate saving using the 45° line?

Use the formula: S = DI − C. The vertical distance between the 45° line and the consumption line shows this difference

If DI = $470 billion and C = $450 billion, what is saving (S)?

S = DI − C = $470 − $450 = $20 billion

What is APC at DI = $470 billion and C = $450 billion?

APC = C / DI = 450 / 470 ≈ 0.96

What is APS at DI = $470 billion and S = $20 billion?

APS = S / DI = 20 / 470 ≈ 0.04

If DI increases from $470 to $490 and C increases from $450 to $465, what is MPC?

MPC = ΔC / ΔDI = (465 − 450) / (490 − 470) = 15 / 20 = 0.75

What is MPS for the same change in income and saving (S increases from $20 to $25)?

MPS = ΔS / ΔDI = (25 − 20) / (490 − 470) = 5 / 20 = 0.25

What is always true about MPC and MPS?

MPC + MPS = 1 — all changes in income are either consumed or saved.

What is always true about APC and APS?

APC + APS = 1 — all income is either consumed or saved.

What does the consumption schedule show?

The various amounts that households would plan to spend at each of the various levels of disposable income.

What occurs at low disposable income levels?

Dissaving

Because disposable income is either consumed or saved…

The fraction of any disposable income plus the fraction saved (NOT CONSUMED) must exhaust the income.