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THE CONCEPT OF CONSUMPTION AND SAVINGS CONTENTS

Here students are introduced to the concepts of consumption and its 
determinants. The section explains in general form, what consumption 
expenditure involves and clearly differentiates consumption function from 
saving function and the derivation of the former from the latter. This unit 
essentially explains consumption function, graph and its determinant with 
special reference to calculations and derivations.
Also, students are introduced to the concepts of Saving and its determinants, it explains in general form, what saving involve and clearly differentiates saving 
function from saving curve and the derivation of saving function from a given 
Consumption function. This essentially explains saving function, graph and its 
determinant with special reference to calculations and derivations.

At the end of this module the student should be able to;
i. Understand the concepts of consumption and saving
ii. Identify and explain both consumption and saving functions 
iii. Derive consumption function from a given saving function.
iv. Determine those factors that influence consumption expenditures.
v. Determine those factors that influence saving function
vi. Understand the relationship among saving, consumption and investment



Concept of Consumption And Saving


Planned consumption expenditure (C) is made up of planned expenditure by 
households on durable and non-durable goods and services, for example, 
household expenditure on plantain, cars, shoes, etc.
It should be noted that consumption is largely influenced by level of income 
among other thing. Based on this fact, the consumption function was established. 
The consumption function is a algebraic or functional relationship between 
consumption expenditure by household and the level of disposable income of 
individual household. Mathematically, consumption is expressed as a function of disposable income. i.e. C = F(Yd). Disposable Income is the personal income (Y) less personal Income tax (T) i.e. Yd = Y – T. In the absence of government, it is 
expected that disposable income be equals gross income which is represented by (Y), in such case consumption will be a function of gross income and not net 
income(disposable income) as explained above. Then it is written algebraically 
and implicitly as C = f(Y) and explicitly as C = a + bY
Saving on the other hand can be defined as part or fraction of disposable income 
kept aside in the national banking system for either future use or to generate 
additional wealth (interest). Therefore, saving is said to be function of income 
(i.e. S=f(Yd)), meaning that amount to be saved depend on the net income of 
every individual. It is noteworthy that the word saving is conceptually different 
from savings, while the former imply the ‗act‘ of keeping money, the latter imply 
collections of the wealth been kept for a given period of time. Saving in 
aggregate term is the total amount saved by all individual household in the 
economy. It is a linear summation of all household saving in a country. 
Algebraically, S = f(Y); S = Y – C
Meaning that, income saved, is current income not consume.

Self Assessment Exercise
i. Clearly explain saving concept.
ii. Explain the concept of consumption.


The Consumption and Saving Functions

The consumption Function

Consumption Function- It is the functional relationship between consumption 
expenditure and disposable income. It can also be described as a mathematical 
expression of household spending in relation to its level of income. Disposal 
income is gross personal income less personal income tax. For the simplest 
consumption function, there are two arguments namely, the non income induced 
consumption (also called autonomous consumption) and income induced 
consumption (i.e fraction of disposable Income desired to consume), disposable 
income is the main determinant of the level of consumption
This consumption function is given by;
C = a + bYd a > 0; 0 < b < 1
Where C = consumption expenditure and Yd = disposable income
The consumption function in this form is a linear function (a straight line) and it 
is interpreted as follows:
“a” measures consumption expenditure when income is zero (0). This is called 
autonomous consumption. It is independent of the level of disposable income (i.e. transfer payments). It is the intercept of the consumption function.
“bY” is income induced consumption expenditure. This is the proportion of 
consumption expenditure that depends on level of disposable income.
“b” this is the slope of the function, it otherwise known as marginal propensity 
to consume(MPC), that is fraction of disposable income consumed at a particular period in time, this is affected or influenced by many factors. It should be noted that MPC is always less than unity but greater than zero, the sum of MPC and marginal propensity to save (MPS) is unity.

From the above diagram, the positively sloped curve represents the consumption 
curve, meaning that household consumption expenditure is positively related to the level of income i.e. the higher the level of income, the higher the household consumption level and vice versa. The letter ‗a‘ represents the consumption level not related to household level of income; it is always above the origin. On the 
other hand the letter ‗b‘ represents the slope which is the marginal propensity to 
consume (MPC). It simply implies a change in consumption level as a result of a change in level of household disposable income

The Saving Function and Curve

The saving function is a mathematical expression of saving and its primary 
determinant. It is given below as;
S = f (Y) ………………………. (1)
S = -a + (1-b) Yd ……………… (2) or
S = -a + (1-b)Y………………… (3)
The first function implies that saving depend on level of income, that is 
individual saving ability depends on individual income and same applies to 
aggregate.
The second function implies a situation in which saving depends on net income 
otherwise known as disposable income i.e Yd = Y-T (gross income less personal 
income tax), while the last being the third function implies a situation where T
= 0.
“-a” is the non income induced saving or autonomous saving, that is , saving at 
zero level of disposal income (dis-saving). “(1-b)” is the marginal propensity to 
save (MPS). “(1-b)Yd” is the income induced saving.


Figure 2.1.1b shows the saving function. The line labelled S = -a + (1-b) Yd is the 
saving function. This function relates saving to the level of disposable income.

Self Assessment Exercise
i. In clear term, explain saving concept and derive saving function from 
an hypothetical schedule
ii. Differentiate between consumption curve and function


Relationship among Consumption, Saving. Investment and Income Level

Income has been theoretically established to be the major determinant of both 
saving and consumption. From the classical school through Keynesian down to monetarist, there is agreement that consumption and saving are largely dependent on the level of income. That is any level of income earned could either 
be saved or consumed or be shared in certain proportion which varies between 
individuals and the economy. These proportions of income that could be saved or consumed are called or known as marginal propensity to save or marginal 
propensity to consume respectively. In the light of the above explanation, it 
could be deduced that any amount spent by any individual or economy depends 
on his (its) net worth which is known in the literature as disposable income 
(GDP). In the same vein, any amount saved by any individual or economy also 
depend on his (its) net worth, invariably level of income dictates the individual 
and aggregate level of both saving and consumption. That is, algebraically;
C = f(Y) and S = f(Y)
Then both saving and consumption are theoretically linked to level of income at 
both individual and aggregate level in such a way that an increase in one will 
mean a decrease in the other.
In the same vein, Saving, Consumption and Investment are jointly influenced by 
the level of income, both on aggregate and individual household level. Saving is 
primarily determined by level of income, same as consumption and investment. 
These three variables are linked together through aggregate level of income or 
household income on a microeconomic level.
The algebraic relationship can be explained as follows:
S = f(Y) ...............1
C = f(Y) ................2
I = f(Y) .................3 or I = f(r) ............4
Y = C + I ................5
Y = C + S .................6
From the above, equation 1 ... 3, imply that, saving, consumption and investment 
are respectively a function of income, while equation 5 and 6, simply expressed 
the fact that income earned is either consumed or invested, similarly, income 
earned is either consumed or saved.

Self Assessment Exercise
i. Clearly show the relationship between saving, consumption and investment.
ii. Establish relationship among income, consumption and saving

CONCLUSION

In this unit we conclude that consumption both on aggregate and individual level
are largely determined by the level of disposable income on individual term and 
on aggregate income on macro or country wide. We also established that both 
saving and consumption are invariably determined by the level of income among 
others. It was also concluded here that both saving and consumption shared level 
of income in no certain proportion.
Also the students are introduced to the concept of saving, explained the 
similarities and dissimilarities between saving and consumption as well as 
graphical illustration of the saving function..

SUMMARY

This unit discussed the concept of consumption and established relationship
between consumption, savings and level of income .relates it to microeconomics 
to bring a clearer picture between the two. It further gives relevant examples on
both macroeconomic and microeconomics concepts and finally discusses the basic tools of macroeconomics analysis with definitions and examples.
This unit equally looked at concept of saving and it determining factors, in 
addition, it establishes relationship between saving, consumption and investment

MARKED ASSIGNMENT

i. Clearly distinguish between consumption and savings concepts.
ii. Enumerate and explain various factors that could influence savings.
iii. Explain various factors that could influence consumption at a particular time 
iv. Define consumption concept.
v. List and explain components of consumption function.

REFERENCES

Attah B.O, Bakare- Aremu, T.A. & Daisi, O.R., (2011); Anatomy of Economics 
Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, 
Lagos, Nigeria
Amacher, R & Ulbrich, H, (1986); Principles of Economics, South Western
Publications Co. Cincinnafi, Oliso
Bakare –Aremu T.A, (2013); Fundamental of Economics Principles
(Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria
Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles 
and Practice of Economics (Macro Approach), Raamson Printing Press, 
Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw 
Hill Irwin, 8thedition.
Familoni K.A, (1990); Development in Macroeconomics Policy, Concept
Publications, Lagos, Nigeria
Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories),
F.E.F International Company, Ikeja, Lagos, Nigeria
Jhingan M.L, (2010); Macroeconomics Theory, 12thedition, Vrinda
Publications (P) Ltd. Delhi, India
Jhingan M.L, (2010); International Economics, Vrinda Publications (P) 
Ltd. Delhi, India

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