Question

Consider the given aggregate consumption schedule. $$ \begin{array}{|c|c|c|} \hline \begin{array}{c} \text { Income } \\ \text { (in billions) } \end{array} & \begin{array}{c} \text { Consumption } \\ \text { (in billions) } \end{array} & \begin{array}{c} \text { Savings } \\ \text { (in billions) } \end{array} \\ \hline \$ 600 & \$ 600 & 0 \\ \hline 700 & 660 & 40 \\ \hline 800 & 720 & 80 \\ \hline 900 & 780 & 120 \\ \hline \end{array} $$ Comment on the MPC MPS, APC and APS in this situation.

Short answer

In the given situation, the MPC is constant at 0.6 across all income levels, indicating a stable consumption pattern in response to changes in income. Meanwhile, the MPS is constant at 0.4, reflecting a stable savings pattern. As income increases, the APC decreases, and the APS increases, revealing that at higher income levels, people allocate a smaller proportion of their income to consumption and a larger proportion to savings.

Step-by-step solution

Calculate MPC and MPS for each income level

To calculate the MPC and MPS for each income level, we will compute the changes between consumption and savings for each change in income: 1. Between \$600 billion and \$700 billion: MPC: \(\frac{\mathrm{Change\ in\ Consumption}}{\mathrm{Change\ in\ Income}}=\frac{660-600}{700-600}=\frac{60}{100}=0.6\) MPS: \(\frac{\mathrm{Change\ in\ Savings}}{\mathrm{Change\ in\ Income}}=\frac{40-0}{700-600}=\frac{40}{100}=0.4\) 2. Between \$700 billion and \$800 billion: MPC: \(\frac{\mathrm{Change\ in\ Consumption}}{\mathrm{Change\ in\ Income}}=\frac{720-660}{800-700}=\frac{60}{100}=0.6\) MPS: \(\frac{\mathrm{Change\ in\ Savings}}{\mathrm{Change\ in\ Income}}=\frac{80-40}{800-700}=\frac{40}{100}=0.4\) 3. Between \$800 billion and \$900 billion: MPC: \(\frac{\mathrm{Change\ in\ Consumption}}{\mathrm{Change\ in\ Income}}=\frac{780-720}{900-800}=\frac{60}{100}=0.6\) MPS: \(\frac{\mathrm{Change\ in\ Savings}}{\mathrm{Change\ in\ Income}}=\frac{120-80}{900-800}=\frac{40}{100}=0.4\) We can see that the MPC and MPS remain constant at 0.6 and 0.4, respectively, for all income levels provided in the table.

Find the APC and APS for each income level

To calculate the APC and APS for each income level, we will divide consumption and savings by income for each income level: 1. At \$600 billion income: APC: \(\frac{\mathrm{Consumption}}{\mathrm{Income}}=\frac{600}{600}=1\) APS: \(\frac{\mathrm{Savings}}{\mathrm{Income}}=\frac{0}{600}=0\) 2. At \$700 billion income: APC: \(\frac{\mathrm{Consumption}}{\mathrm{Income}}=\frac{660}{700}\approx0.943\) APS: \(\frac{\mathrm{Savings}}{\mathrm{Income}}=\frac{40}{700}\approx0.057\) 3. At \$800 billion income: APC: \(\frac{\mathrm{Consumption}}{\mathrm{Income}}=\frac{720}{800}=0.9\) APS: \(\frac{\mathrm{Savings}}{\mathrm{Income}}=\frac{80}{800}=0.1\) 4. At \$900 billion income: APC: \(\frac{\mathrm{Consumption}}{\mathrm{Income}}=\frac{780}{900}\approx0.867\) APS: \(\frac{\mathrm{Savings}}{\mathrm{Income}}=\frac{120}{900}\approx0.133\)

Comment on the MPC, MPS, APC, and APS

Based on our calculations, we can comment on the given situation as follows: - MPC remains constant at 0.6 across all income levels, which means that for every additional dollar of income, consumption increases by 60 cents, and savings increase by 40 cents. This indicates a stable consumption pattern in response to changes in income. - MPS remains constant at 0.4 across all income levels, which means people save 40 cents for every dollar increase in income, leading to a stable savings pattern. - APC decreases as income increases, meaning that as income grows, people allocate a smaller proportion of their income to consumption and a larger proportion to savings. - APS increases as income increases, meaning that as income grows, people allocate a larger proportion of their income to savings and a smaller proportion to consumption.

Key concepts

Marginal Propensity to Consume (MPC)

Understanding the Marginal Propensity to Consume, or MPC, is crucial for students studying economics, as it explains consumer spending behavior relative to changes in income. It is calculated by dividing the change in consumption by the change in income. In a simple formula, it's represented as \(\mathrm{MPC} = \frac{\mathrm{Change\ in\ Consumption}}{\mathrm{Change\ in\ Income}}\).

An MPC value of 0.6, uniform across the income levels in our example, implies that for every additional dollar earned, consumers on average are spending 60 cents and thus leaving the remaining portion of the income for savings. This constant MPC suggests a consistent consumer behavior within the income range given.

Marginal Propensity to Save (MPS)

Parallel to the concept of MPC is the Marginal Propensity to Save (MPS), which reflects the portion of additional income that is saved rather than spent. Just like MPC, MPS can be expressed as \(\mathrm{MPS} = \frac{\mathrm{Change\ in\ Savings}}{\mathrm{Change\ in\ Income}}\).

With an MPS of 0.4 across our income levels, students can infer that out of the extra dollar earned, 40 cents go into savings. This stability in MPS indicates that saving habits are not changing significantly as the income varies, which might suggest a firm saving objective or pattern in the economy or among the population studied.

Average Propensity to Consume (APC)

Moving on to the Average Propensity to Consume (APC), this metric shows the proportion of income spent on consumption. The formula for calculating APC is \(\mathrm{APC} = \frac{\mathrm{Consumption}}{\mathrm{Income}}\).

Our example shows a decreasing APC as income increases. This indicates that as people earn more, they tend to spend a smaller percentage of their total income on consumption. It is essential to note that an APC greater than one suggests that consumption exceeds income, which could indicate borrowing or drawing from savings, while an APC less than one shows that spending is within the income limits.

Average Propensity to Save (APS)

Finally, the Average Propensity to Save (APS) represents the fraction of total income that is saved. Calculating APS involves the formula \(\mathrm{APS} = \frac{\mathrm{Savings}}{\mathrm{Income}}\).

In the given scenarios, as income grows, APS increases. This pattern suggests that with higher incomes, a larger portion is stashed away for savings. This could reflect long-term financial planning among consumers and is a crucial concept in understanding overall savings trends within an economy. A rising APS with income implies that as people become wealthier, they find more opportunities or necessity to save, possibly due to reduced urgency to spend on immediate needs.