İKTİSADA GİRİŞ II - Deneme Sınavı - 15

MPC = change in consumption / change in income

MPC + MPS = 1

MPI = change in import / change in income

Interest Rate: The investment objective of a firm is to be able to obtain profit from this investment. For this reason, the higher the expected profitability of the investments is, the higher the investment amount will be. The main factor determining whether an investment is profitable is the interest rate. Interest rate can be defined as the cost of borrowing funds. A large part of the investment expenditures made by the enterprises is covered by borrowing. If the cost of borrowing, i.e., interest rate, increases, fewer investment projects will become profitable. Accordingly, when the interest rate increases, investment expenditures will decrease and when the interest rate falls, investments will increase

Autonomous investments refer to the level of investment expenditures which is determined independent of income.

Autonomous consumption is equal to 150.

When there is a 100 TL change in income, the consumption changes 50 TL.

For the consumption function, MPC is 0.50. Because of this equation MPS+MPC=1, MPS is 0.50.

MPC+MPS=1.

So MPS=1-MPC.

MPS=1-0.83=0.17

The consumption is negatively affected by an increase in pessimistic expectations.

When the capacity utilization rate is low, investment expenditures will also tend to decrease.

As the price of capital goods increases, the expected profit for investment will decrease.

The main factor determining whether an investment is profitable is the interest rate.

The slope of the AE curve for a closed economy different from the slope of the AE curve for an open economy because of import.

CONSUMPTION AND SAVING

Households use the income they earn in three different ways. They can spend their income for the consumption of goods and services, saving money and paying taxes. If we consider that the tax, which will be included in the model later, is not the case at this stage, the income (Y) will be equal to the sum of consumption (C) and savings (S):

Y = C + S

Therefore, the portion of income that is not consumed can be defined as savings. It is not possible to distinguish between the factors that encourage consumption and those that encourage savings, which we are interested in.

The main factor determining the consumption expenditures to be made in a given period is the income level. Along with the increase in income, the desire and purchasing power of households to make consumption expenditures also increases. This linear and positive relationship between income and consumption expenditures is called consumption function.

CONSUMPTION AND SAVING

Households use the income they earn in three different ways. They can spend their income for the consumption of goods and services, saving money and paying taxes. If we consider that the tax, which will be included in the model later, is not the case at this stage, the income (Y) will be equal to the sum of consumption (C) and savings (S):

Y = C + S

Therefore, the portion of income that is not consumed can be defined as savings. It is not possible to distinguish between the factors that encourage consumption and those that encourage savings, which we are interested in.

The main factor determining the consumption expenditures to be made in a given period is the income level. Along with the increase in income, the desire and purchasing power of households to make consumption expenditures also increases. This linear and positive relationship between income and consumption expenditures is called consumption function.

Marginal Propensity to Consume and Marginal Propensity to Save

Consumption expenditures are composed of the sum of autonomous consumption and consumption expenditures related to the income (induced consumption). As we discussed above, an increase in the level of income also increases consumption expenditures related to income. This relationship between the change in income and the change in consumption is called marginal propensity to consume (MPC) and is defined as the ratio of consumption change to income change:

MPC = Change in consumption / Change in Income

Marginal Propensity to Consume and Marginal Propensity to Save

Consumption expenditures are composed of the sum of autonomous consumption and consumption expenditures related to the income (induced consumption). As we discussed above, an increase in the level of income also increases consumption expenditures related to income. This relationship between the change in income and the change in consumption is called marginal propensity to consume (MPC) and is defined as the ratio of consumption change to income change:

MPC = Change in consumption / Change in Income

On the other hand, the sum of marginal propensity to consume and marginal propensity to save has to be equal to 1 since the income that is earned must be consumed or saved: MPC + MPS = 1

Marginal Propensity to Consume and Marginal Propensity to Save Marginal propensity to consume is the slope of the consumption function and marginal propensity to save is the slope of the saving function. From your Introduction to Economics-I course, remember that the steeper the function is, the higher the slope will be. For example, starting from the same autonomous expenditure level, from two different consumption functions, the steeper one will have a higher slope. Therefore, the MPC, this consumption function represents will be higher relative to the other one.

Factors that Effect Consumption Expenditures

There are different factors that influence the consumption decisions of households. Some of these factors are not related to income. Changes in factors that affect consumption other than income are changes in autonomous consumption. In this case the consumption function shifts downward or upward as a whole. Now we can turn to principal factors that affect consumption expenditures.

Disposable Income,

Wealth: Wealth is the value of all assets that households have. These include houses, automobiles, bank accounts, stocks and all kinds of assets such as income expected to be obtained in the future. When the wealth of households increases, the available resources that can be allocated for spending increase, too. As a result, the amount of consumption expenditure at each income level will increase.

Expectations: Another important factor for determining consumption is the expectations about future income, prices and wealth. For example, if consumers expect a stagnation in the economy, they expect that they will lose their jobs or their working hours will be reduced. In this case, they will reduce their consumption expenditures and therefore they will save more.

Demographic Factors: When the other factors effecting consumption are assumed to be constant, an increase in population will increase consumption expenditures. Here, both the increase in the number of people in the country and the changes in the age composition of the population have an effect on the consumption expenditures. While the size of the population affects the location of the consumption function, the age composition of the population has an effect on the slope of the consumption function. Other factors being constant, an increase in the size of population leads to an increase in autonomous consumption, and therefore the consumption function shifts upward. Considering the age composition of the population, it is known that the young population spends more on durable consumption goods and therefore the young population has a higher marginal propensity to consume than the elderly population. Since the slope of consumption function is measured by MPC, the rising share of the young people in total population will make consumption function steeper.