| Chapter 5. The Household-Consumption Sector#1: Graphing the Consumption Function
Using the graph of the consumption function in Figure 5.1, we can find the level of consumption and savings at various levels of disposable income.
Both consumption and savings are read vertically.
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Figure 5.1
First let's measure consumption when disposable income is 4,000. Even if you think you have no idea, just guess. When disposable income is 4,000, C = 4000. Consumption is the vertical distance between the horizontal axis and the C line. So when disposable income is 4,000, consumption is also 4,000. When disposable income is 8,000, how much is consumption?
When disposable income is 8,000, consumption is 5,000. Again, we measure the vertical distance from the horizontal axis (where disposable income is 8,000) straight up to the C line. How do you know that distance is 5,000? You glance over at the vertical axis. Now how much is C when disposable income is 2,000?
When disposable income is 2,000, C is 3,500. Again, we measure C vertically, from the point on the horizontal axis where disposable income is 2,000, straight up to the C line.
Now let's find saving at each of these levels of disposable income. If we know disposable income and we know C, we can easily find saving. We use the equation: Disposable income = consumption + saving. See if you can find the level of saving when disposable income is 2,000.
Solution: Write down the formula (disposable income = C + saving), plug in the numbers for disposable income and C, and then solve for saving.
| Disposable income | = | C + saving | | 2000 | = | 3500 + saving | | -1500 | = | saving |
So saving is -1500. When saving is negative, we called it "dissaving."
Now see if you can find saving at a disposable income of 4,000.
Solution:| Disposable income | = | C + saving | | 4,000 | = | 4000 + saving | | 0 | = | saving |
And finally, find saving when disposable income is 8,000.
Solution:| Disposable income | = | C + saving | | 8000 | = | 5000 + saving | | 3000 | = | saving |
Now let's find consumption and saving at various levels of disposable income using the data in Figure 5.2. First, find C and saving when disposable income is 9000.
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Figure 5.2
Solution: When disposable income is 9000, C = 7500. Saving would be 1500.
Now find C and saving when disposable income is 3000.
Solution: When disposable income is 3000, C = 4500. Savings = -1500.
Finally, find C and saving when disposable income is 8000.
Solution: When disposable income is 8000, C = 7000 and saving = 1000.
#2: Autonomous Consumption vs. Induced Consumption
What is the difference between autonomous consumption and induced consumption? Autonomous consumption is the level of consumption when disposable income is 0. It never changes. Induced consumption is 0 when disposable income is 0. As disposable income rises, it induces an increase in consumption. So induced consumption rises as disposable income rises.
See if you can find the levels of autonomous consumption and induced consumption when disposable income is 0 in Figure 5.2.
Solution: When disposable income is 0, induced consumption is 0. Autonomous consumption is the vertical distance from the horizontal axis (where disposable income is 0) up to the C line. So autonomous consumption is 3000. Keep in mind that C = autonomous consumption + induced consumption. When disposable income is 0, C = 3,000 (which is the sum of 3,000 + 0).
How much is autonomous consumption and induced consumption when disposable income is 6,000?
Solution: When disposable income is 6,000, C = 6,000. Since autonomous consumption remains 3,000, then induced consumption must equal 3,000 (consumption of 6,000 = autonomous consumption of 3,000 + induced consumption of 3,000).
Finally, how much is autonomous consumption and induced consumption when disposable income is 9,000?
Solution: At a disposable income of 9,000, C = 7,500. Since autonomous consumption still = 3,000, induced consumption = 4,500. |
2002 McGraw-Hill Higher Education