Equilibrium Level of Income

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Equilibrium Level of Income
The Consumption and Saving Functions
Consumption is the part of income spent on goods and services yielding direct satisfaction. It occupies the biggest chunk of the expenditure on output. Y= C+S
Where Y= Income
C= Consumption
S= Saving
Factors Influencing Consumption
1. Distribution of national income
2. Interst rate
3. Desire to hold cash
4. Price level
5. Population
6. Income
7. Taxes
8. Attitudes and values

Consumption function is the relationship between consumption and income. All thing being equal, the amount of consumption depends on income. The higher the income, the higher also is the consumption and vice versa.

Income| Consumption|
100| 185|
200| 240|
300| 300|
400| 365|
500| 420|
600| 470|

Consumption schedule

Changes in the income result to changes in the consumption. It can be measured by taking the Marginal Propensity to Consume (MPC) or the slope of the consumption function. Algebraically, it is obtained with this formula:

If the consumption is equal to the income, then the MPC is equal to one. When the consumption is less than the income, the MPC gets less than one. And when the consumption exceeds income, the MPC is greater then one. Is it possible thet the consumption gets higher than the income? This is possible by utilizing past savings or getting into borrowing.

Saving is the part of income that is not consumed. If the income equals the consumption, there is no saving. When the income exceeds the consumption, the saving is positive and when the income is less than the consumption, the saving is negative or there is a dissaving.

S= Y-C
Income(Y)| Consumption| Savings|
100| 185| -85|
200| 240| -40|
300| 300| 0|
400| 365| 35|
500| 420| 80|
600| 470| 130|

A change in the income can affect the saving. This can be measured thru the Marginal Propensity to Save (MPS) or the slope of the...
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