SAVING FUNCTION OR PROPENSITY TO SAVE

by • 02/07/2011 • B.COM PART 1 EconomicsComments (0)848

It is the positive relation between household saving and household disposable income. It is a function relationship between the total savings and national income.

AVERAGE PROPENSITY TO SAVE(A.P.S):

Average propensity to save means savings divided by the disposable income. It is relationship between total savings and total income.

A.P.S  =         Total Savings

_______________

Total Income

S                  Rs.20

=  _____      =   ________    =  0.2  or 20 %

Y                 Rs.100

MARGINAL PROPENSITY TO SAVE (M.P.S):

This is the ratio of change in saving resulting from a change in income. It is the flip side of the marginal propensity to consume. If income increases from Rs.100 to Rs.200 and saving from Rs.20 to Rs.50 then MPS will be:

MPS    =                  ∆S

_____

∆ Y

Rs.50                 Rs.20                       30

=     ______     _      _______           =       ____           =  0.3

Rs.200               Rs.100                     100

Income (Y) Consumption                  (C)

Saving (S)

APS = S/Y

MPC = ∆S/∆Y

150 170 -20

-20/150= -1.2

—-

200 200 0

0/200 = 0

20/50 = 0.4

250 225 25

25/250 = 0.1

25/50 = 0.5

300 245 55

55/300 = 0.18

30/50 = 0.6

 

In the above schedule we can observe that as income increases consumption also increases but not as equal to income therefore savings appear. With increase in income APS increases but MPS increases more than MPS.

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