The relationship between consumption and income. C = f(Y), where C = Consumption and Y = Income
Absolute Income Hypothesis
As national income increases, consumption spending increases, but by diminishing amounts. As national income increases, the marginal propensity to consume (MPC) decreases.
Marginal Propensity to Consume
MPC = Marginal Propensity to Consume - the ratio of the change in consumption spending to a given change in income. MPC = change in C/change in Y
Relative Income Hypothesis
As national income increases, consumption spending increases as well, always by the same amount. As national income increases, the MPC remains constant.
Permanent Income Hypothesis
The hypothesis that people's consumption depends on their long-run expected (permanent) income rather than their current income.
A person's MPC is relatively high during young adulthood, decreases during the middle years, and increases when the person is at or near retirement.
Income that individuals expect to receive annually.
The unexpected gain or loss of income during a year.
The part of consumption that is independent of the level of disposable income.
Marginal Propensity to Save
MPS = Marginal Propensity to Save - the change in one's savings caused by the change in one's income. MPS = change in savings (S)/change in income (Y)
Investment spending that business producers plan to make.
The part of investment that is independent of the level of disposable income.