1

Consumption
6

CHAPTE
R

MACROECONOMICS SIXTH EDITION

N. GREGORY MANKIW
PowerPoint Slides by Ron Cronovich
2007 Worth Publishers, all rights reserved

Consumption Function Keynes

C = a+ bY
C = Consumption
Y = Disposable Income
b = MPC
a = Constanta

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Keyness conjectures
1. 0 < MPC < 1
2. Average propensity to consume (APC )

falls as income rises.

(APC = C/Y )
3. Income is the main determinant of

consumption.

CHAPTER 16

Consumption

slide 3

The Keynesian Consumption Function

Heres a consumption function
with the properties Keynes
conjectured:

C = a+ bY

b= MPC
= slope of
the
consumpti
on function

c
1

a
Y
CHAPTER 16

Consumption

slide 4

The Keynesian Consumption Function

C

As income rises, the APC falls

(consumers save a bigger fraction of
their income).

C = a+ bY

C C
APC
c
Y Y
slope =
APC
CHAPTER 16

Consumption

Y
slide 5

Early Empirical Successes:

Results from Early Studies
Households with higher incomes:
consume more
MPC > 0
save more
MPC < 1
save a larger fraction of their income
APC as Y
Very strong correlation between income
and consumption
income seemed to be the main
determinant of consumption
CHAPTER 16

Consumption

slide 6

Problems for the

Keynesian Consumption Function
Based on the Keynesian consumption
function, economists predicted that C
would grow more slowly than Y over time
( APC <<)
This prediction did not come true:
As incomes grew, the APC did not fall,
Simon Kuznets showed that C/Y was
very stable in long time series data.

CHAPTER 16

Consumption

slide 7

The Consumption Puzzle

Consumption
function from long
time series data
(constant APC )

Consumption
function from
cross-sectional
household data
(falling APC )
Y
CHAPTER 16

Consumption

slide 8

Irving Fisher and Intertemporal

Choice

Assumes consumer is forward-looking and

chooses consumption for the present and future
to maximize lifetime satisfaction.

Consumers choices are subject to an

intertemporal budget constraint,
a measure of the total resources available for
present and future consumption.

CHAPTER 16

Consumption

slide 9

The basic two-period model

Period 1: the present

Period 2: the future
Notation
Y1, Y2 = income in period 1, 2
C1, C2 = consumption in period 1, 2
S = Y1 C1 = saving in period 1
(S < 0 if the consumer borrows in period 1)

CHAPTER 16

Consumption

slide 10

Deriving the intertemporal

budget constraint

Period 2 budget constraint:

C 2 Y2 (1 r ) S
Y2 (1 r ) (Y1 C1)

Rearrange terms:
(1 r ) C1 C 2 Y2 (1 r )Y1

Divide through by (1+r ) to get

CHAPTER 16

Consumption

slide 11

The intertemporal budget

constraint
C2
C1
1 r
present value of
lifetime consumption

CHAPTER 16

Consumption

Y2
Y1
1 r
present value of
lifetime income

slide 12

The intertemporal budget

constraint
C2

C2
Y2
C1
Y1
1 r
1 r

(1 r )Y1 Y2
Saving
The
The budget
budget
constraint
constraint shows
shows
all
all combinations
combinations
of
of C
C11 and
and C
C22 that
that
just
just exhaust
exhaust the
the
consumers
consumers
resources.
resources.
CHAPTER 16

Consumption

Y2

Consump =
income in
both periods
Borrowing

Y1

C1

Y1 Y2 (1 r )
slide 13

The intertemporal budget

constraint
C2
Y2
C1
Y1
1 r
1 r

C2

The
The slope
slope of
of
the
the budget
budget
line
line equals
equals
(1+r
(1+r ))

(1+r )
Y2

Y1
CHAPTER 16

Consumption

C1
slide 14

Consumer preferences
An indifference
curve shows
all combinations
of C1 and C2
that make the
consumer
equally happy.

C2

Higher
Higher
indifference
indifference
curves
curves
represent
represent
higher
higher levels
levels
of
of happiness.
happiness.
IC2
IC1
C1

CHAPTER 16

Consumption

slide 15

Consumer preferences
Marginal rate of
substitution (MRS ):
the amount of C2
the consumer
would be willing to
substitute for
one unit of C1.

C2

MRS

The
The slope
slope of
of
an
an indifference
indifference
curve
curve at
at any
any
point
point equals
equals
the
the MRS
MRS
at
at that
that point.
point.

IC1
C1
CHAPTER 16

Consumption

slide 16

Optimization
The optimal (C1,C2)
is where the
budget line
just touches
the highest
indifference curve.

C2

At
At the
the optimal
optimal point,
point,
MRS
MRS == 1+r
1+r

C1
CHAPTER 16

Consumption

slide 17

How C responds to changes in

Y
Results:
Provided they are
both normal goods,
C1 and C2 both
increase,
regardless of
whether the
income increase
occurs in period 1
or period 2.
CHAPTER 16

Consumption

C2

An
An increase
increase
in
in Y
Y11 or
or Y
Y22
shifts
shifts the
the
budget
budget line
line
outward.
outward.

C1
slide 18

Keynes vs. Fisher

Keynes:
Current consumption depends only on
current income.

Fisher:
Current consumption depends only on
the present value of lifetime income.
The timing of income is irrelevant
because the consumer can borrow or lend
between periods.
CHAPTER 16

Consumption

slide 19

How C responds to changes in r

C2

An
An increase
increase in
in rr
pivots
pivots the
the budget
budget
line
line around
around the
the
point
point (Y
(Y11,Y
,Y22).).

A
Y2
Y1
CHAPTER 16

Consumption

C1

slide 20

How C responds to changes in r

income effect: If consumer is a saver,

the rise in r makes him better off, which tends to
increase consumption in both periods.

substitution effect: The rise in r increases

the opportunity cost of current consumption,
which tends to reduce C1 and increase C2.

Both effects C2.

Whether C1 rises or falls depends on the relative
size of the income & substitution effects.
CHAPTER 16

Consumption

slide 21

Constraints on borrowing

In Fishers theory, the timing of income is irrelevant:

Consumer can borrow and lend across periods.

Example: If consumer learns that her future income

will increase, she can spread the extra consumption
over both periods by borrowing in the current period.

However, if consumer faces borrowing constraints

( liquidity constraints), then she may not be able to
increase current consumption
and her consumption may behave as in the
Keynesian theory even though she is rational &
forward-looking.
CHAPTER 16

Consumption

slide 22

Constraints on borrowing
C2

The budget
line with no
borrowing
constraints
Y2

Y1
CHAPTER 16

Consumption

C1
slide 23

Constraints on borrowing
The borrowing
constraint takes
the form:

C2

The budget
line with a
borrowing
constraint

C1 Y1
Y2

Y1
CHAPTER 16

Consumption

C1
slide 24

The Life-Cycle Hypothesis

due to Franco Modigliani (1950s)
Fishers model says that consumption
depends on lifetime income, and people
try to achieve smooth consumption.

The LCH says that income varies

systematically over the phases of the
consumers life cycle,
and saving allows the consumer to
achieve smooth consumption.

CHAPTER 16

Consumption

slide 25

The Life-Cycle Hypothesis

The basic model:
W = initial wealth
Y = annual income until retirement
(assumed constant)
R = number of years until retirement
T = lifetime in years

Assumptions:
zero real interest rate (for simplicity)
consumption-smoothing is optimal

CHAPTER 16

Consumption

slide 26

The Life-Cycle Hypothesis

Lifetime resources = W + RY
To achieve smooth consumption,
consumer divides her resources equally
over time:
C = (W + RY )/T , or
C = W + Y
where
= (1/T ) is the marginal propensity to
consume out of wealth
= (R/T ) is the marginal propensity to
consume out of income
CHAPTER 16

Consumption

slide 27

Implications of the Life-Cycle Hypothesis

The Life-Cycle Hypothesis can solve the
consumption puzzle:
The APC implied by the life-cycle
consumption function is
C/Y = (W/Y ) +
Across households, wealth does not
vary as much as income, so high
income households should have a lower
APC than low income households.
Over time, aggregate wealth and
income grow together, causing APC to
remain stable.
CHAPTER 16

Consumption

slide 28

Implications of the Life-Cycle Hypothesis

$

The LCH
implies that
saving
varies
systematica
lly over a
persons
lifetime.

Wealth

Income
Saving
Consumption

Dissaving

Retirement
begins
CHAPTER 16

Consumption

End
of life
slide 29

Model Konsumsi Siklus Hidup (Life Cycle

Hypothesis)
Tokohnya: Ando Brumberg dan Modigliani
Menurut teori ini besarnya pengeluaran konsumsi sangat
dipengaruhi oleh perjalanan usianya

The Permanent Income Hypothesis

due to Milton Friedman (1957)
The PIH views current income Y as the
sum of two components:
permanent income Y P
(average income, which people expect
to persist into the future)
transitory income Y T
(temporary deviations from average
income)

CHAPTER 16

Consumption

slide 31

The Permanent Income Hypothesis

Consumers use saving & borrowing to
smooth consumption in response to
transitory changes in income.

The PIH consumption function:

C = Y

where is the fraction of permanent

income that people consume per year.

CHAPTER 16

Consumption

slide 32

The Permanent Income Hypothesis

The PIH can solve the consumption
puzzle:
The PIH implies
APC = C/Y = Y P/Y
To the extent that high income
households have higher transitory
income than low income households,
the APC will be lower in high income
households.
Over the long run, income variation is
due mainly if not solely to variation in
permanent income, which implies a
CHAPTER 16 Consumption
slide 33
stable APC.

PIH vs. LCH

In both, people try to achieve smooth
consumption in the face of changing
current income.

In the PIH, current income is subject to

random, transitory fluctuations.

Both hypotheses can explain the

consumption puzzle.

CHAPTER 16

Consumption

slide 34

The Random-Walk Hypothesis

due to Robert Hall (1978)
based on Fishers model & PIH, in which
forward-looking consumers base
consumption on expected future income

Hall adds the assumption of rational

expectations, that people use all
available information to forecast future
variables like income.

CHAPTER 16

Consumption

slide 35

The Random-Walk Hypothesis

If PIH is correct and consumers have
rational expectations, then consumption
should follow a random walk: changes in
consumption should be unpredictable.
A change in income or wealth that was
anticipated has already been factored
into expected permanent income, so it
will not change consumption.
Only unanticipated changes in income or
wealth that alter expected permanent
income will change consumption.
CHAPTER 16

Consumption

slide 36

Implication of the R-W Hypothesis

IfIf consumers
consumers obey
obey the
the PIH
PIH
and
and have
have rational
rational
expectations,
expectations, then
then policy
policy
changes
changes
will
will affect
affect consumption
consumption
only
only ifif they
they are
are
unanticipated.
unanticipated.
CHAPTER 16

Consumption

slide 37

Summing up
Keynes suggested that consumption
depends primarily on current income.

Recent work suggests instead that

consumption depends on
current income
expected future income
wealth
interest rates

Economists disagree over the relative

importance of these factors and of
borrowing constraints and psychological
factors.
CHAPTER 16

Consumption

slide 38

Preferensi Konsumen
1. Indifference Curves
menampilkan preferensi konsumen yang terkait
dengan konsumsi dalam dua periode bisa ditampilkan

2. Marginal Rate Of Substitution

kemiringan dari setiap titik pada kurva indiferens
yang menunjukkan berapa banyak konsumsi periodekedua yang dibutuhkan untuk dikompemsasikan bagi
1 unit pernurunan dalam konsumsi periode pertama

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

OPTIMISASI
Normal Goods : jika konsumen
menginginkan suatu barang lebih banyak
ketika pendapatannya naik
Consumption smoothing : tanpa
memperhatikan apakah kenaikan
pendapatan terjadi dalam periode pertama
atau periode kedua, konsumen
menyebarkan kenaikan tersebut pada
konsumsi dalam kedua periode

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Income effect
perubahan konsumsi yang disebabkan
oleh pergerakan ke kurva indiferens
yang lebih tinggi
Jika konsumsi dalam periode satu dan
konsumsi dalam periode dua merupakan
barang normal, konsumen akan
menyebarkan perbaikan kesejahteraan
selama kedua periode

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Substitution Effect
Perubahan konsumsi yang disebabkan
oleh perubahan harga relatif konsumsi
pada kedua periode tersebut
Dampak substitusi ini cenderung
membuat konsumen memilih lebih
banyak konsumsi dalam periode dua dan
lebih sedikit konsumsi dalam periode
satu

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Tabungan, Investasi, dan Sistem

Keuangan
Chapter 13

43

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12/12/15

Ruang Lingkup

Usaha baru membutuhkan modal, baik dalam

bentuk barang modal (mesin produksi atau
tempat usaha) dan modal kerja.
Kemungkinan sumber modal:

Modal dari dalam equity (dalam bentuk modal

sendiri)
Modal dari luar equity dan debt

Modal dari luar diperoleh dari saving pihak

lain melalui financial system.

44

Financial Market
Financial Intermediary
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Financial Market

Pasar Obligasi (bond market)

Pada Pasar Modal Indonesia, pasar obligasi tidak

seramai pasar saham
Obligasi yang diperdagangkan: Obligasi Retail
Indonesia, Surat Utang Nagara.

Pasar Saham (stock market)

45

Pasar perdana (primary market) Initial Public

Offering
Pasar Sekunder (Secondary market) Bursa Efek
Indonesia.
Perlu: kemampuan untuk menilai kewajaran harga
saham rasio Price to Earning = 15.
Hadi Paramu Economics for Business

12/12/15

Financial Intermediary

Ada dua financial intermediary bank dan reksa dana

(mutual fund)
Bank memediasi kepentingan penabung dan
peminjam.

Fungsi primer: saving and lending interest income untuk

bank
Fungsi lain: memperlancar transaksi fee-based income.

Reksa dana lembaga yang menjual shares kepada

masyarakat dan menginvestasikan dana tersebut
untuk investasi pada portofolio saham dan obligasi

46

Jika nilai portofolio naik, nasabah untung, dan sebaliknya.

Memudahkan masyarakat dengan dana kecil untuk
berinvestasi di pasar modal
Tidak perlu skill yang bagus ada fund manager.
Hadi Paramu Economics for Business

12/12/15

Saving dan Investment pada National

Income

Ingat: Y = C + I + G + NX
Dalam sistem closed economy:
Y = C + I + G atau
YC G=I
Sisi kiri dalam persamaan disebut dengan
national saving, sehingga
S=I

47

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12/12/15

Macam Saving

Private saving tabungan masyarakat

jumlah income yang tersisa setelah
membayarkan pajak (T) dan konsumsi
Y T C = private saving

Public saving pendapatan pajak dikurangi

oleh pengeluaran pemerintah
T G = public saving
dengan demikian:
S = (Y T C) + (T G)

48

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12/12/15

Budget Surplus dan Budget Deficit

Budget surplus penerimaan pajak lebih

besar daripada pengeluaran pemerintah
T G > 0 atau
T>G
Budget deficit:
T G < 0 atau
T<G

49

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12/12/15

Saving dan Investment

Dalam percakapan umum, saving dan

investment dianggap sama.
Saving adalah menginvestasikan dana
kelebihan income atas konsumsi
Investment adalah investasi pada barang
modal
Secara nasional: S = I
Secara individual: S I

50

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12/12/15

Market for Loanable Funds

Ada dua partisipan dalam market for loanable

funds:

Demander dalam hal ini adalah I

Supplier dalam hal ini adalah S

Interaksi antara kedua pihak (S dan I) akan

menentukan tingkat bunga (sebagai harga
dari sebuah loan) dan jumlah loanable fund.
Kebijakan pemerintah dapat mempengaruhi
interaksi S dan I

51

Policy 1; Saving Incentive pajak tabungan

Policy II: Investment Incentives tax holiday
Policy III: Government budget surplus and deificit
Hadi Paramu Economics for Business

12/12/15