Income consumption and saving relationship tips

Saving Function of Income: Meaning and Relationship between Saving and Income

There is only a relationship between consumption and savings. It was mentioned that you have an disposable income which you use for your consumption. Economists have established the functional relationship between income and Saving is defined as the difference between income and consumption. During . ways. Those who are not familiar with the aggressive-defensive approach. Relationship between Consumption and Savings Income = Consumption + Savings The largest part of total spending is Consumption. C= f(Y) If.

Income, consumption and saving are all closely linked. Economic studies have shown that income is the primary determinant of consumption and saving. Rich people save more than poor people, both absolutely and as a percent of income.

The very poor are unable to save at all. Instead, as long as they can borrow or draw down their wealth, they tend to save.

Income - Consumption and Saving Relationship Assignment Help

That is they tend to spend more than they earn reducing they're accumulated saving or going deeper into debt. So we can say that there is a deep relationship between consumption, income and saving and they all affects to each other.

More precisely personal saving is that part of disposable income that is not consumed, saving equals income minus consumption.

It's a very simple idea. It's really just the notion that income, income in aggregate in an economy can drive consumption in aggregate in an economy. Just to make things tangible, I will construct a consumption function for a hypothetical economy, and we can debate whether we can construct a better one. All the numbers don't have to be exactly what I'm about to do, but this is just to make things concrete in your mind. Maybe we have a hypothetical economy where consumption is going to be equal to It's hard to image, but let's say there isn't.

There will still be consumption. Maybe people can do it by digging into their savings. They're essentially using resources that they've already accumulated in some way. Let's say that base level of consumption, let's call that It could be billions of dollars or gold coins or clamshells or whatever the unit of measuring economic activity is in our economy.

That's our base level of consumption. I'm just picking these numbers somewhat arbitrarily. Let's say if there's some above and beyond the base level, they're going to spend 0. Actually, to be a little bit more particular, I'll write not just income, I'll write disposable income. I'll want to do that in a different color. I make the distinction, just to clarify our model, between income and disposable income because all of the aggregate income in an economy does not end up in consumers' pockets.

Just for a simplification, you might say, "Yeah, some of it ends up in firms' pockets," but the firms, at the end of the day, are owned by individuals, so it can end up in individuals' or consumers' pockets. But some of it goes off to the government.

When you think about income, and if you spend any time looking at your pay stub this will become familiar to you, you have your income but you don't end up with all of that in your checking account or your pocket or your savings account. A good fraction of that is taken out for taxes. What you have left over when you subtract taxes out of income, that is your disposable income. That's why I write this here because that's actually a more reasonable thing to say.

Consumption function basics

They obviously can't spend a fraction of stuff that they don't have, the stuff that's taken out for taxes. Just to visualize this, we can draw it.

This will be a line. Since they are not measured on either axis, we should note that a change in a non-income determinant of consumption will shift the entire consumption function not merely move you along a fixed consumption function. Wealth—In economics wealth and income are two separate variables. A simple example will illustrate the difference.

The same could be said about sudden increases in the value of a piece of art that you own, the discovery of oil on your property, or increases in the value of your stock portfolio. None of these occurrences increases your income, but they all increase your wealth.

  • Saving Function of Income: Meaning and Relationship between Saving and Income

An increase in wealth will increase your consumption even at the same income level, and can be illustrated by an upward shift in both the Consumption Function and the Savings Function. Obviously, a decrease in wealth will have the opposite effect. Expectations—There are times when consumers adjust their spending, based not on their actual income but rather on their expectations of future changes in their income.

Changes in expectations will cause a shift in the curve, because consumption has changed without an actual chance in income. For example, if you think your income is going to go up in the future, you may consume more today. Not that we suggest this as a wise course of action, but it has been observed that some college seniors start to spend more once they have secured a job, even though that job and its attendant income will not start for a month or two.

This behavior would be illustrated by an upward shift in the consumption function showing that your consumption has increased even though your actual disposable income has not. Likewise, if for some reason you were pessimistic about your future income rumors floating around the company that layoffs were eminent you might decrease your consumption, even though your actual current income had not changed.

Consumer Indebtedness—Consumers adjust their consumption to levels of indebtedness as well. We observe in the aggregate economy that when indebtedness goes up, consumption falls and savings rise.

There is a level of debt beyond which consumers feel uncomfortable with additional spending. Even if income has stayed the same, if too much debt accumulates, consumers will start to spend less and pay off debt. This is illustrated by a downward shift in the Consumption Function and an upward shift in the Savings Function remember that paying off debt is the same thing as increasing savings.

What is Consumption Function (in Hindi) - Macroeconomics Concept

The opposite is also true. At low levels of debt people will consume more and save less.