The Saving Function

So just like we have a consumption function. Well, guess what? We have a savings function as well. Let's look at it. So it's very similar to the consumption function. And it follows a lot of the same ideas that we thought about when we are dealing with the consumption function. So the savings function. Well, guess what? It deals with the amount of household savings to the level of disposable income? Okay, So sometimes we call it savings functions savings schedule, just like we had for consumption function. It's sometimes called the consumption schedule. Okay, so remember disposable income, we use it either for consumption or savings and it's what's left after paying for taxes. So we either use it to pay for our consumption or pay for our savings. So in this case we're going to focus on the savings a little bit more before we're doing the consumption. Let's check out the savings side. So let's think about our pop coins again, 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 due to this? Are you likely to increase your total savings, decrease your total savings or your total savings will stay the same? Generally, what's gonna happen is you're gonna get that extra income and you're gonna consume some of it, You might buy yourself something nice, but you're gonna save some of it too. Right? So you're likely to increase your total savings and that's exactly the same as what we expected with consumption. Right. So any increase in disposable income is going to increase your consumption and it's gonna increase your savings as well. So notice what we have here. We have that 45 degree line. And we're gonna have a very similar discussion here where we have the 45 degree line. And what did that tell us at any level of disposable income, we're saving all of that disposable income. So let's say this was $1000 in disposable income. What we're gonna save $1,000 as well. Right. So that's what the 45° line tells us that at any level disposable income it's all being saved. So naturally we're not expecting to save everything, right? We're not gonna save all of our disposable income. We're gonna consume some of it and save some of it. So what are we gonna have? We're gonna have some sort of line like this? Right, we're gonna have some sort of line that looks something like this, right? We're gonna save some of it and we're gonna consume some of it. So we've got the same points as before where we have the point where it touches the 45 degree line and that's where we're saving everything? But what about at points like this where we're out here, what if we're at point? So we'll say at point a just like before all disposable income in this case is saved right before in the consumption function. Well, all disposable income was consumed and it looked very similar to this, right? So, what about that point B. At point B. Notice what we have. We have this level of disposable income out here, but a smaller level of of um savings right here, and this is generally what we would expect. We would expect to have some high level of disposable income. We're saving some of it and we're consuming the rest, Right? So this, right here would be our consumption, right? The consumption that we have. Because if if we're saving if we're saving this amount, well, naturally we're consuming the other bit right there, Right? So, we have some consumption there. And generally, I wouldn't expect us to be at a point down here where we would have uh like here on point C on the savings schedule. Because what is this telling us this is telling us we're saving more than are disposable income. We're taking all our disposable income and we're not even consuming anything. We're un consuming things. So, it kind of doesn't really make sense down there, as it does with the consumption function. Right? So, with the savings function, it's very similar. We're at point B we have some savings, some consumption. So, it's gonna follow in our discussion, just like we had with our marginal propensity to consume and marginal propensity to save. Well, guess what they're still relevant here, except now. Since it's the savings function, The marginal propensity to save is the one that matters more here. So remember marginal propensity this is the household savings compared to disposable income. So we're saying marginal, we've got one more so one more dollar of income. And we'll say what? Why? The one more disposable income. How much is our savings going to increase? And just like the MPC was the slope of the consumption function? The M. P. S. Is the slope of the savings function. I've got consumption function. There should be right on your page. Savings function there, Right? Savings function. So the mps is the slope of the savings function. And just like we saw these are same formula as before. Right? The change in savings divided by the change in disposable income. And that's exactly what we see on the graph. Right. So our mps are changed in savings is going to be dependent on the change in disposable income. So, if we look at a point on the graph here, for right here, we're going to increase our consumption. Excuse me, are disposable income by that much? What will increase our savings by that much there? Right. And generally the savings function is gonna be a lot shallower. It's not gonna be as steep because what we do we mostly consume extra income and then we're gonna save a portion of it, right? Sometimes you you get a paycheck and you save maybe $20 out of each paycheck. Right? You're saving just a tiny bit of the paycheck each time. So we would expect the marginal propensity to save to be generally smaller than the marginal propensity to consume. And that's the last thing we have here. Just as a reminder, marginal propensity to consume, changing consumption over change in disposable income. Cool, Alright, so that's about it here, let's go ahead and move on to the next video.