TAILIEUCHUNG - Lecture Economics (6/e): Chapter 5 - Stephen L. Slavin

Learning objectives of this chapter include: The average propensity to consume, the average propensity to save, the marginal propensity to consume, the marginal propensity to save, the consumption function, the saving function the determinants of consumption, the permanent income hypothesis. | Chapter 5 The Consumption Sector Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-1 Chapter Objectives The average propensity to consume The average propensity to save The marginal propensity to consume The marginal propensity to save The consumption function The saving function The determinants of consumption The permanent income hypothesis 5-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Consumption Consumption is the nation’s expenditures on all final goods and services produced during the year at market prices Consumption will be almost $2 trillion dollars in 2002 $2,000,000,000,000 $2,000 billion $ trillion Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-3 Four Parts of GDP Consumption ------------ C (this chapter) Investment ---------------- I (Chapter 6) Government -------------- G (Chapter 7) Net Exports --------------- Xn (Chapter 8) 5-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Consumption Americans spend over 95% of their income after taxes The total of everyone’s expenditures is called consumption Consumption is designated by the letter C C is the largest sector of GDP Now C is just over two-thirds of GDP Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-5 Consumption (Continued) The consumption functions states As income rises, consumption (C) rises, but not as quickly Therefore, consumption varies with disposable income (DI) DI increases . . . C increases but by a smaller amount DI decreases . . . C decreases but by a smaller amount 5-6 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Consumption and Disposable Income Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-7 Consumption and Disposable Income (Continued) + 1000 + 800 + 1000 + 800 + 1000 + 800 + 1000 + 800 5-8 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Saving Saving is NOT spending The

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