So let's learn a little bit more about consumption by looking at it on the graph, we're gonna check out the consumption function. So the consumption function, Remember consumption, this is the amount of household spending. When we think about consumption, this is money that households spend on consuming things, right, They're gonna they're gonna buy things and use them. So this is the consumption here that we're talking about the part of GDP, right? So consumption here, when we think about it, we have to think about the level of disposable income. Okay, so when we think about disposable income, this is the money that households have left after they pay for taxes, right? They're gonna earn some income, they're gonna pay for taxes and then whatever's left over, they're gonna have a disposable income. So when we look at the consumption function, sometimes it's called the consumption schedule, it's just another name for it, we're just gonna be looking at it on the graph. Okay, so like I just said disposable income is the amount left after paying for taxes and what do you think we can do when we have some money left over, we can either use it, the disposable income can either be used for consumption or if we don't consume it, we're gonna save it. So consumption or saving. Okay, so when we think about this disposable income on a macro level on a grander scale? Well, it's gonna be all of the national income, all the income that gets earned in in every way, shape or firm form minus the taxes that get paid, right? So what's left over is going to be consumption or savings. Cool. So let's think about it logically. Let's think about consumption a little bit. So you work we got a pop quiz here. You work in a candy factory That has been making tons of sweet sweet profit for all your hard work and dedication. You receive a bonus of $10,000 and an annual raise of 20% of your current salary. That sounds pretty nice due to this. What do you think is gonna happen? So you you're you have more money, you got $10,000 additional and a salary increase. What do you think you are likely to increase your total consumption? You're likely to decrease your total consumption or your total consumption will stay the same. It's probably gonna go up right when you have more money you might not spend all that money, right? You're gonna have more disposable income, I'll put D I. For disposable income up. Well that means you're gonna consume more, you'll probably consume a portion of that extra money. You'll go out and buy yourself you know something nice, you you've got this big bonus, you'll buy yourself something nice and you might save some of it too. Right? So your savings will go up as well. So that's the idea here is the more disposable income that you have, the more you're likely to consume. Okay and that's what we're going to see here in the consumption function. So let's go ahead and take it down to the graph. And let's talk about some key features here when we think about consumption. Alright, So the first thing I want to show you is what we call the 45 degree line. So the 45 degree line is basically every dollar of disposable income is getting used for consumption. So the 45 degree line is gonna look something like this. I'm gonna do it in blue and it's gonna go straight across just like this. And what does this tell us notice at every every increase in disposable income. Let's say we're right here and let's say this is $1,000. Well, right here we're at $1000 of consumption, right? So the 45 degree line says that every dollar that we have a disposable income is going to be consumed. Now that's not what the consumption function looks like, but it's a good reference point. So this here is the 45 degree line. Okay. And it's going to be a reference point when we look at the consumption function. So now let's draw in a random consumption function, what it might look like. Okay. So what we'll think is that even if you had no disposable income, let's say you you didn't make any money, you're still gonna consume stuff, right you need consumption to live, that's going to include the food, the shelter, right? All sorts of things that you have, you're gonna be consuming during the year. So you're gonna have some level of consumption. Let me go to read. You're gonna have some level of consumption regardless of having any disposable income. So let's say that's the level of consumption without any disposable income. And as you have more disposable income, well, your consumption is gonna increase, right? So we'll have something like that, your disposable income um increasing and your consumption increasing as well. Right? So what does that tell us? Let's look at a few features of this consumption function. So this we're gonna say is the consumption function. And you can imagine that for everybody, the consumption function is going to be a little different, right? Some people might be willing to save a little bit more money, some people might be willing to consume a little bit more. Everyone's a little different. But when we look at it on a grand scale, we can kind of average it out. And we can say for each extra dollar of income that gets made. Well, this is what we expect more to be consumed on, on the national level, on average. Right? So let's go ahead and look at this consumption function. Let's look at a couple of features here. So what do we see right here at this spot right here where the 45° line touches the consumption function. Well, everything is being consumed, right? All disposable income. So I'm gonna put I'm gonna put a right here at a all disposable income is consumed. But what about other points, Right? Because at that point we're touching the 45 degree line and just like we saw down here, $1000 of disposable income, $1000 consumed. That's gonna keep going all the way up everywhere, it's going to be equal. So at other points, let's look at a point, say here on the consumption function. Let's look at point B. Right here, what's happening at point B. At point B. We have a higher level of disposable income. Let's say if that was 3000 here, 3000, let's go. Let's go a little bit over. So, we're right on the line here, Right here, let's let's assume we're at this point where we said, Let's say we have 4000 of disposable income. Well, what's happening up here would be 4000 of consumption though, Right, 4000 consumption's way up there. So we're not consuming all 4000 of the disposable income, right? We're consuming a little bit less. We're consuming down here. So what does that tell us? What is that difference between the 45 degree line and the consumption line? Remember what we said about disposable income up above, Right? Disposable income. It can either be consumed or It can be saved. Right? So this difference between the 45° line and the and and the consumption function this is going to be savings right here. So this little green area is the amount of the disposable income that was saved. Yeah. You guys following there. So the idea is we're gonna have some level of disposable income and we're either gonna consume it or save it. And the consumption function helps us gauge the amount that's being consumed or saved. Alright. So one more thing we're gonna mention here on the consumption function is one other point. So here at point B let me do it in red A. Point B. We have some savings, right? Some of our disposable income is being saved. Now what about down here? Let's pick a point down here at point C. So right here where we will have $1000 of disposable income. So point C. Well now what's happening, we're consuming more than our disposable income. We have something called disk savings where we're actually going into our savings that we that we had before or we're taking on new debt to to be able to manage this level of consumption. So you can see that there's going to be a point here where we have disc savings when we're below that threshold. So right here I'm gonna write this savings this savings. So we're consuming more um then consuming more than our disposable income. Cool. So that's point C. And those are the key features here, this savings and I'm gonna write consuming more than disposable income. Okay so those are the key things to know about the consumption function. Alright, now let's pause here, and then we're gonna talk about two key another another feature of the consumption function here, with the marginal propensity to consume. All right, let's do that in the next.

Alright. So now that we're familiar with with the consumption function, let's think about one more feature here and it's gonna be called the marginal propensity to consume. Just like we saw as we have more disposable income we're gonna consume a little bit more. And just like we said in our example with the candy store right? What we saw is we got a big bonus at work, we got a lot of extra money. And what what were we expecting to do? We're expecting to consume more. Maybe buy ourselves a gift but we're not gonna spend all of that bonus. We might save some of it as well. So what's gonna happen is that as we add disposable income some of it's gonna be consumed, some of it's going to be saved. And that's the idea of the marginal propensity to consume is actually how much are we going to consume and how much are we gonna save? So the marginal propensity to consume. Remember when we talk about this word marginal, what's marginal meant all throughout this class, marginal adding one more, right? When we add one more how do things change when we add one more? So in this case we're gonna see how much consumption changes when we when disposable income changes right? How much is consumption gonna change when disposable income changes? So um let's before we fill this in. Let's look at our our formula here. So the marginal propensity to consume, we call it MPC. It's the change in consumption. The little delta there meaning change. So how much more consumption when we change disposable income? So let's say we increase disposable income by one, how much Is consumption going to increase? Right? So we could expect maybe we have one more dollar of consumption of disposable income. We earn one more dollar. Maybe we'll spend 75 cents of that dollar and we'll save the rest of it. Right? It could be any number. Um In this case let's say it's 75 cents. Right? So we would have a marginal propensity to consume of 0.75. Okay so it's going to have to be something um between zero and one right? We're going to have $1 of extra income and we're either gonna spend um we're gonna spend some proportion of it in between zero and one. So in this case we're spending 75% of it and of course the rest of it we would be saving. So that's what we have in the marginal propensity to save. That's the amount you're gonna your savings change? How much savings change on disposable income changes. So you're gonna get an extra dollar of disposable income. And in this case how much are you gonna save? Right so for each dollar of disposable income? Well you're gonna save some of it? Right? So naturally if you didn't consume it you're gonna save it. So in this case we'll say You save 25% of of that extra money that you get? So let's go back up to the graph. What does that tell us about the graph? Let's think, let's think about the marginal propensity to consume and the consumption function. What does it tell us remember marginal propensity to consume? Is the change in consumption over the change in disposable income. So for every extra dollar that we get in disposable income as we move right on this graph, how much are we going up? What does that sound like? What what's one of those key words about a line? Notice the consumption functions align here. What do you think that marginal propensity to consume is it's the slope of the line, right? How much is it gonna go up? How much is our consumption gonna go up as we get extra disposable income? Right. So that's what we see here for each dollar of of extra disposable income. So as we move from this point out here you do that a little better. I'll do it in black actually new color. So as we move, come on black, come over here. Okay, here we go. So as we move here and now we move out, how much are we moving up? Right, so that is our marginal propensity to consume and notice that it's constant along our consumption function? Because we have a line and lines have a constant slope. Okay, so that's what we're gonna be dealing with here. Is that the slope is that marginal propensity to consume? Cool. Let's take a pause here and we're gonna dive into these topics of marginal propensity to consume and save a little more on the next page.

Alright, so let's learn a detail here about the marginal propensity to consume and to save. So recall that when we talked about disposable income, we said that whenever we have disposable income wherever they were either going to use it for consumption, we're saving right? It's gonna be one or the other here. So it follows that any increase in disposable income, if we have extra disposable income, just like we saw, it's either gonna be consumed, we're saved, right? Any extra money we have, it's either gonna be consumed or saved, and that's going to depend on that marginal propensity of whether how much of that disposable income you want to consumer saved. So what follows here, what we see is that the disposable income equals the consumption or savings, right? Because any disposable income, we're either gonna consume it or save it. So that means any change in disposable income and I'll do change in, I'm gonna say why for disposable income? Because we've been using y for income in other videos, so change in y is gonna equal the change in consumption. Plus the change in savings, right? If we have an extra dollar of disposable income, well, it's either gonna increase our consumption or increase our savings so they're gonna stay equal there. So now what I wanna do is I want to take this and I want to divide it by the change in y So notice divide by the change in y if we do that to everything here, which we can do. Thanks to the rules of algebra, you're just gonna have to trust me if you don't remember that one, we can divide everything by the change in y. And what does what does that leave us with notice? Change in y divided by change and why? What is that equal? Anything divided by itself? Well, that's going to equal one, right? This equals one. And what does change in consumption over change in disposable income? Look back on the previous page, when we define marginal propensity to consume, right? The change in consumption divided by the change in income disposable income. Well, that's your marginal propensity to consume plus your marginal propensity to save. Okay, so that's what if the marginal propensity to consume plus the marginal propensity to save, they're always gonna equal one. And that's because this whole identity of whenever we have extra income. Well, it's gonna either be consumed or saved. Okay, So it's either gonna go towards the marginal propensity to consume or the marginal propensity to save their Okay, so sometimes they might give you um let's say in a problem, they might tell you, oh, the marginal propensity to consume is 0.6. Well, you can already infer that the marginal propensity to save is going to be the other 0.4, right? Because they have to equal out to one. All right, let's pause here. And let's talk about the consumption function as the equation of a line. Alright, let's do that in the next video

Alright. So do you guys remember back to algebra when we learned the equation for a line? A lot of us might have learned it as Y equals mx plus B, write Y equals M. X plus B. Some of us learned it as Y equals A X plus B either way. Um We're talking about the same thing here and we're talking about a line and if you look back on the graph, remember when we talked about the consumption function? It was a line, right? And we knew what the slope was and we know what the variable is that's going to change our consumption. And let's go ahead and define some of these things here. So we can talk about the consumption function as a line, as an equation just the same. So in this case m M. Is what's being moved? Is the rate that we're changing here? So M is the slope of the line here, Which is which is what just classic algebra there, write Y equals mx plus B. M. Is the slope of the line. And in this case the slope just like we saw in the in the graph that's the marginal propensity to consume right for every extra dollar of income. Well, how much of it are we gonna consume? That's gonna be the increase in the line there. So what's gonna be the X. Here? What is driving the consumption the disposable income? Right? As we have more disposable income while we're consuming more. So X. Is disposable income, right? The disposable income? And what we use sometimes for for uh a symbol for this is we've been using Y. For income and sometimes we just call it y de sometimes with a little uh subscript D. Like that. Sometimes you see a whole full lower case letter D. Like we have in our equation below. And then what's gonna be B what's B. Remember B. Is the Y intercept? Right? The Y intercept. And this is what what the amount of consumption that we have when disposable income equals zero, right? When we have no disposable income, well we're still gonna have to consume something, right? We're still gonna have food to eat, we're still gonna need shelter, we're still gonna need some expenses um when we have no disposable income. Okay so you can be given um an equation of the consumption function line. They can tell you um an equation like C equals 0.75 X. Plus 50. Right? Something like that. And you can solve for consumption at any level of disposable income if you had a disposable income of 10. Well you would put in 10 into this equation and you would solve for disposable income. Excuse me, solve for consumption there. Right. Cool. So that's about it here, let's get some practice using all of these equations in the next video