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OVERVIEW
Income determination- refers to economic
income which is earned through economic
activities.
national income reflected in the value of
production
personal economic income-income earned by
households as factor contributors
Assumptions to emphasize
essential features of income
determination:
Households are the only factor contributors
Personal savings is the only leakage from
the system
National Income (NI) is equal to Gross
National Product (GNP)
Basic Concepts of
Consumption
Consumption- is the act of using goods and
services to satisfy human wants.
Business consumption- indirectly satisfies
Household consumption- directly satisfies
- one of the determinants of National/Factor Income
Current consumption
Expenditures on capital goods
Consumption Function
Y= C + C
Where:
Y = Factor Income
C = Borrowings from economys
savings
C = Change in consumption
stock of
Multiplier Concept
Multiplier- the process of generating income through the
circular flow exchange between the households and the
firms.
Multiplier coefficient- measures the average number of times
every peso of inflow circulates and changes hands in the
system as income.
Marginal propensity to consume (MPC)- consumption factor of
the multiplier
Marginal propensity to save (MPS)- savings factor of the
multiplier
FORMULA:
S= i
i= Y - C orY= i + C
Where:
S= aggregate savings from currently
generated income
i= inflow
Real consumption
APC =
Real disposable income
12-9
Real saving
APS =
Real disposable income
12-10
MPC =
Real consumption
Real disposable income
12-11
MPS =
Real saving
Real disposable income
12-12
FORMULA:
Y= CM
M=
1 =
1- (MPC)
1
MPS
Where:
M= multiplier coefficient
(MPC)= Marginal propensity to consume
MPS= 1-(MPC)= Marginal propensity to save
Relationships
Average propensity to consume and average
propensity to save must sum to 100% of
total income. (APC + APS = 1)
Marginal propensity to consume and
marginal propensity to save must sum to
100% of the change in income. (MPC +
MPS = 1)
CONCLUSION:
The smaller the MPS, the larger
the multiplier.
The larger the MPC, the larger
the multiplier.
Sample Problem:
If your disposable income increases from
P50,000 to P57,500 a year, and your savings
increases from P25,000 a year to P28,000 a
year.
Calculate
MPS
MPC
Multiplier Effect
GDP (assume AD is P4,500 )
SAVINGS
Saving
The act of not consuming all of ones current income
Whatever is not consumed is, by definition, saved.
Saving is an action measured over time (a flow).
Savings are a stock, an accumulation resulting from the
act of saving in the past.
Dissaving
Negative saving; a situation in which spending exceeds
income
Summary: Determinants of
Savings
An increase in
Causes
savings to
Reason
Current income
Rise
Expected future
income
Fall
Wealth
Fall
Expected real
interest rate
Not clear.
Probably rise.
Factors of Consumption
1) Framework
Personal consumption- is the households
realized demand to satisfy current needs.
) Same increase in income yields greater consumption
and marginal propensity to consume
) Income level varies directly with consumption
depending on the size of inflows
) Savings factors indirectly determine consumption and
savings can be traded for each other in the same
personal income.
3) Population
Population size- also determines
consumption needs and, therefore, affects
consumption expenditures with a given
income.
4) Income
Level of income can increase with more infusions in the
circular flow
Increase in aggregate consumption subsequently
multiplies into higher income levels
Propensity to consume varies across consuming units to
which income is distributed because of the varying
influence of demand factors
Example:
Tastes and preferences
Income level: In Low income bracket & In High income bracket
5) Price Level
Individual product demand- inversely proportional to
price due to change in purchasing power and
substitution with other products
Aggregate volume of consumption is inversely
proportional to price but only due to a change in
purchasing power
A change in the general price level can spur further
consumers reaction through a shift in individual
demand curves which changes aggregate
consumption expenditures
Example:
The general price level drastically increased by
around 40% in the next several months from the
outbreak of economic crisis in 1983.
Therefore:
Price
*in value
Demand
Spending* Save
CONSUMPTION CHANGES
RELATIONSHIP:
Cn results in Cn + Cn and Cn + Cn
y
y + y C + C
At the expense of:
Ce results in Ce + Ce and Ce + Ce
y
y + y
Where:
Cn= Consumption of non-essential items y= Income
Ce= Consumption of essential items = Change
C = Consumption of all items
C + C
Example:
A family that spends 25% of their income
on food at an income level of P50,000
will spend P12,500 on food. If their
income increases to P100,000, it is not
likely that they will spend P25,000 (25%)
on food, but will spend a lesser
percentage while increasing in other
areas.
THE END
GROUP III
Jennifer Bingil
Jasmin Alagasi
Duane Jade Abalos
Kristoffer Carlo Gimenez