Concept of Savings, Investment And Consumption And Their Determinants, APC and MPC, APS and MPS - SS3 Economics Lesson Note
Savings
Savings refers to the portion of income that is not spent on consumption. Savings can take many forms, such as bank deposits, investments, or cash. Saving money is important for individuals, as it allows them to build wealth and achieve their long-term financial goals. In the context of an economy, savings are important because they provide the funds that are used for investment.
Consumption
Consumption refers to the use of goods and services by individuals or households. Consumption is an important driver of economic growth, as it creates demand for goods and services. When people spend money on consumption, businesses earn revenue and can hire more workers and invest in their operations. However, excessive consumption can also lead to unsustainable levels of debt and a lack of savings.
Investment
Investment refers to the allocation of resources to long-term projects or assets that are expected to generate a return. Investment can take many forms, such as stocks, bonds, real estate, or business ventures. Investment is important for economic growth, as it provides the funds that are used to create new businesses, develop new technologies, and build infrastructure. However, investment can also be risky, and investors must carefully assess the potential risks and returns before making any investment decisions.
MPC, MPS, APC, and APS are important concepts in economics that describe how people use their income. Enumerated below is a brief explanation of each and how they are related:
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MPC (Marginal Propensity to Consume): This refers to the portion of an additional dollar of income that is spent on consumption. For example, if a person's MPC is 0.8, it means that they spend 80 cents out of every additional dollar they earn on consumption.
MPS (Marginal Propensity to Save): This refers to the portion of an additional dollar of income that is saved rather than spent on consumption. For example, if a person's MPS is 0.2, it means that they save 20 cents out of every additional dollar they earn.
APC (Average Propensity to Consume): This refers to the percentage of total income that is spent on consumption. For example, if a person earns $1,000 and spends $800 on consumption, their APC is 0.8 or 80%.
APC= CY=8001000=0.8
Where Y = total income, C = amount of income consumed
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APS (Average Propensity to Save): This refers to the percentage of total income that is saved rather than spent on consumption. For example, if a person earns $1,000 and saves $200, their APS is 0.2 or 20%.
APS=SY= 2001000=0.2
Where Y = total income, S= amount of income SAVED
The relationship between these concepts can be described using the following equations:
MPC + MPS = 1
APC + APS = 1
These equations show that the marginal propensities (MPC and MPS) and the average propensities (APC and APS) must add up to 1. This means that every additional dollar of income must be either spent on consumption or saved, and the percentage of income that is spent on consumption and the percentage that is saved must add up to 100%.
In other words, when income increases, people can either spend more on consumption (increasing their APC and decreasing their APS), save more (increasing their APS and decreasing their APC), or a combination of both (with MPC and MPS changing accordingly). Understanding these concepts and their relationship can help economists and policymakers understand how changes in income will affect spending and saving patterns in the economy