Class notes
ECO102 Week 3
- Course
- ECO102 (ECO102)
- Institution
- University Of Toronto (U Of T )
Lecture notes of 4 pages for the course ECO102 at U of T (Week 3 notes)
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Chapter 21 National Output. Four groups of expenditure decision . average propensity to consume (APC):
makers: domestic households, firms, is the part of the disposable income you
governments, foreign purchasers of want to consume 𝐴𝑃𝐶 =
𝐶
(falls as
𝑌𝑑
domestically produced commodities
disposable income rises)
. Desired aggregate expenditure (AE) is
. Marginal Propensity to Consume
the desired expenditures on domestically
(MPC): how much you consumption
produced output
goes up by for every other $1
. National income = Actual expenditure ∆𝐶
𝑀𝑃𝐶 = (slope of the AEF)
. autonomous expenditure is those that ∆𝑌𝑑
are not related to the national income, (constant to show that at any level of
like the y-intercept disposable income, MPC is the same)
. Induced expenditure is spendings that . the 45° line a constant line conducted
are related to the national income of all the points where 𝐶 = 𝑌𝑑
. since we assume in this model that . Average propensity to save (APS):
there is no government, disposable Proportion of disposable income that
𝑆
income 𝑌𝑑 = 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 households want to save. 𝐴𝑃𝑆 = 𝑌𝑑
. savings: all disposable income that is . Marginal Propensity to save (MPS):
not spent on consumption The change in desired saving to the
change in disposable income.
The consumption Function ∆𝑆
𝑀𝑃𝑆 = ∆𝑌𝑑
. relates the total desired consumption
. 𝐴𝑃𝐶 + 𝐴𝑃𝑆 = 1 , 𝑀𝑃𝐶 + 𝑀𝑃𝑆 = 1
expenditures of all household to the
. NOTE: Amount of saving is = vertical
several factors that determine it like,
distance between the consumption
. disposable income
. wealth function and the 45° line
. interest rates
. expectations about the future Shifts of the consumption function
. ↑disposable income = ↑ desired . changes in disposable income =
consumption & savings (positively movement along the curve
related) . changes in wealth, interest rates,
. the theory of the consumption household expectations = shifts of the
function says that we assume the consumption function
household not only looks at their . What happens to consumption when
current disposable income but their wealth increases and disposable income
future’s as well, and they are either is constant? Less current income needs
optimistic or pessimistic to be saved for the future, and
consumption increases.
. ↑ consumption function, ↓savings
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