5 Steps to a 5 AP Macroeconomics 2019

94 ❯ Step 4. Review the Knowledge You Need to Score High

At every level of DI, the consumption function tells us how much is consumed. Both

Table 8.1 and Figure 8.1 tell us that at incomes below $200, the consumer is consuming

more than his income. As a result, saving is negative, and this is referred to as dissaving.

But at incomes above $200, the consumer is spending less than his income, and so saving

is positive.

Saving

The saving schedule above can also be converted into a linear equation, or saving function:

S = – 40 + .20(DI)

The constant $–40 is referred to as autonomous saving because it does not change

as DI changes. With zero disposable income, the household would need to borrow $40

to consume $40 worth of goods. The slope of the saving function is .20. This function is

plotted in Figure 8.2.

Disposable

Income

Consumption

Consumption

Function

40

200

200

280

S = $20

300

Figure 8.1

Disposable

Income

Saving

0

200

− 40

Saving

Function

dissaving,

S < 0

saving,

S > 0

Figure 8.2

Marginal Propensity to Consume and Save

An important lesson from the study of microeconomics is the marginal concept. You can

think of it in two equivalent ways. Marginal always means an incremental change caused

by an external force, or it is always the slope of a “total” function. The same is true here.

KEY IDEA