AS INCOME RISES, CONSUMPTION RISES, BUT NOT

AS QUICKLY

AVERAGE PROPENSITY TO CONSUME

PERCENTAGE OF DI SPENT

PERCENTAGE OF DI SAVED

APC?• 0.9375• 93.75% IS SPENT TO SERVICES & GOODSAPS?• 0.0625• 6.25% OF HIS INCOME GOES TO HIS SAVINGS • APC + APS = 1

DISPOSABLE INCOME SAVING

80, 000 5,000

• IS IT POSSIBLE TO HAVE AN APC GREATER THAN 1?

• WHAT DOES 1 SUGGEST?– YOU SPEND BEYOND YOUR MEANS. YOU SPEND

MORE THAN YOUR INCOME– NO SAVINGS!

DISPOSABLE INCOME CONSUMPTION

25,000 29,000

YEAR DISPOSABLE INCOME CONSUMPTION

2013 18,000 10,000

2014 21, 000 14, 000

AS INCOME RISES, CONSUMPTION RISES (BUT BY LESS THAN DOES INCOME)C

4,000 / 3,000 = 1.33

MPC?

YEAR DISPOSABLE INCOME CONSUMPTION

2013 18,000 10,000

2014 21, 000 14, 000

AS INCOME RISES, BOTH CONSUMPTION AND SAVING WILL RISE

SOLVE FOR SAVINGS FIRST:8,000 -7,000 = 1,000

MPS?

1,000/ 3,000 = .33

SIGNIFICANCE OF “C” CROSSING THE 45* LINE?

CONSUMPTION < DI

MPC? = DI IS FROM 6 TO 8

DI = FROM 68

C?5.5

7

1.5/2 = 0.75

CONSUMPTION SCHEDULE

CONSUMPTION > DI

SAVING FUNCTION

INCOME BELOW 4? = DISSAVING

DISSAVING = SAVING BELOW 0

DI = C + S DI – S = C DI – C = S

FIND C & S IF DISPOSABLE INCOME IS 2

C= 2.5 S= -.5

AUTONOMOUS CONSUMPTION ?

LEVEL OF CONSUMPTION WHEN DISPOSABLE

INCOME IS 0

PEOPLE WILL SPEND A CERTAIN AMOUNT ON

THE NECESSITIES OF LIFE EVEN WITHOUT INCOME

INDUCED CONSUMPTION ?

INDUCED = INFLUENCE/ PERSUADE

CAN A DISPOSABLE INCOME OF 0 INDUCE CONSUMPTION?

AS DISPOSABLE INCOME RISES, INDUCE CONSUMPTION ALSO RISES

AS DISPOSABLE INCOME FALLS, INDUCE CONSUMPTION ALSO FALLS

CONSUMPTION = AUTONOMOUS CONSUMPTION + INDUCED CONSUMPTION

C = AC + IC C – AC = IC C - IC = AC

AUTONOMOUS CONSUMPTION ? INDEPENDENT OF

DISPOSABLE INCOME

LEVEL OF CONSUMPTION WHEN DISPOSABLE

INCOME IS 0AUTONOMOUS

CONSUMPTION IS 40

INDUCED CONSUMPTION

IC? IF 360 IS C

C = AC + IC

IC = 320

3 CATEGORIES OF CONSUMPTION

Things that last a while – at least 3 years

THINGS THAT DON’T LAST LONG

NONDURABLES

SERVICES

set of actions that are performed to provide a set of outcomes for

consumer’s satisfaction

INTANGIBLE

DETERMINANTS OF THE LEVEL OF CONSUMPTION

1) DISPOSABLE INCOME2) CREDIT AVAILABILITY3) STOCK OF LIQUID ASSETS IN THE HANDS OF

THE CONSUMERS4) STOCK OF DURABLE GOODS IN THE HANDS

OF CONSUMERS5) KEEPING UP WITH THE JONESES 6) CONSUMER EXPECTATIONS

Level of DI largely determines the level

of C

AT VERY LOW INCOME LEVELS, PEOPLE

ACTUALLY DISSAVE

PRICE OF CONSUMPTION YOUR DAILY NEEDS DON’T

CHANGE

TO MEET YOUR DAILY NEEDS, YOU BORROW CREDIT OR YOU’LL GO TO

YOUR SAVINGS

LENDER: (CREDO/ BELIEVES) LENDS

RESOURCES

ENTRUSTING: LATER PAYMENTS

DEBTOR: BORROWERCREDIT AVAILABILITY: WHEN

CREDIT IS EASED, PEOPLE TEND TO BORROW MORE

CREDIT AVAILABILITY VARIES INVERSELY WITH THE LEVEL OF

CONSUMER DEBT.THE MORE YOU OWE, THE

LESS CREDIT AVAILABLE

STOCK OF LIQUID ASSETS IN THE HANDS OF THE CONSUMERS OWNED THINGS THAT

CAN BE QUICKLY TURNED INTO CASH

33 million shares of facebook’s stock and the price of the stock rises to 35?

1.15 billion richer at least on paper

Brokers will encourage you to invest your money

on other shares

WOLF OF WALLSTREET:

COMMISSION ON EACH INVESTOR

THEY GET

SALES OF DURABLE GOODS VARY INVERSELY WITH THE STOCK OF CONSUMER DURABLES

IN THE HANDS OF THE CONSUMERS

WHEN PEOPLE HOLD A LARGE STOCK OF CONSUMER DURABLES, CONSUMER

DURABLE SALES TEND TO BE LOW

1999 = 3210 costs P10, 000

SIM CARD COSTS P 1,000

AFTER 15 YEARS = NOKIA LUMIA COSTS P7, 900

AFTER 15 YEARS = MY PHONE AGUA COSTS P2, 988

WHEN PEOPLE HOLD A LARGE STOCK OF CONSUMER DURABLES, CONSUMER

DURABLE SALES TEND TO BE LOW

CONSPICUOUS

STANDING OUT SO AS TO BE CLEARLY VISIBLE

KEEPING UP WITH THE JONESES

IF WE DON’T BUY IT, WE WON’T BE KEEPING UP

KEEPING UP WITH THE JONESES

CONSUMER EXPECTATION

WHEN INFLATION IS EXPECTED, PEOPLE BUY MORE WHEN RECESSION IS EXPECTED,

PEOPLE BUY LESS

ESTIMATING FUTURE EARNINGS UNTIL ONE RETIRES

PERMANENT INCOME HYPOTHESIS

PEOPLE GEAR THEIR CONSUMPTION TO THEIR EXPECTED EARNINGS MORE

THAN TO THEIR CURRENT INCOME

Income is greater than consumption during the middle

ages (30-50)

496 X 2 = 992, 000

992, 000 – 496, 000 = 496, 000 (REMAINING BALANCE)

10, 522 X 60 MONTHS

631, 320 – 496, 000

135, 000 INTEREST

HOW CERTAIN ARE YOU THAT YOU WILL NOT INCUR OTHER

ADDITIONAL/ EMERGENCY EXPENSES WITHING THE NEXT

5 YEARS?