Presentation on Consumption, Saving & Investment by Aadarsh Shrestha. This is the topic of Macro Economics.

1. Consumption, Saving
& Investment
Presented by: Aadarsh Shrestha

2. Consumption
• Expenditure on consumption at a given level of income.
• Spending income for buying goods and services to satisfy wants.

3. Consumption Function
• Functional relation between income & consumption.
• Also known as Propensity to Consume.
Algebraically,
C = f(Y)

4. Technical Attributes
• Average Propensity to Consume(APC)
APC = C
Y
• Marginal Propensity to Consume(MPC)
MPC = ∆C
∆Y

5. Properties of MPC
• Positive
• Less than unity
• Short run MPC is stable
• MPC of the poor is greater than that of the rich.

6. Measures To Raise Propensity
• Income Redistribution
• Wage Policy
• Social Security
• Other Measures
o Easy Credit Facility
o Urbanization
o Advertising Industry

7. Saving
• Excess of Income over Consumption Expenditure.
• “Is determined by Rate of Interest” – Classical Economists
Algebraically,
S = Y - C

8. Saving Function
• Functional relation between income and saving.
Algebraically,
S = f(Y)

9. Technical Attributes of Saving
• Average Propensity to Save (APS)
APS = S
Y
• Marginal Propensity to Save (MPS)
MPS = ∆S
∆Y

10. Types of Saving
• Personal Saving
• Corporate Saving
• Government Saving
• Forced Saving

11. Determinants of Saving
• Level Of Income
• Rate of Interest

12. Paradox of Thrift
• Popularized by J.M. Keynes
• “Saving is virtue for private & public.” – Classical Economist
• “Saving is virtue for Private & vice for Public.” – Keynes
S ↑ → C↓ → D↓ → P↓ → I↓ → L↓ → Y↓ → S↓

13. Investment
• Creation of Capital Stock.
• Does not involve second hand transaction
• Generate new jobs & create income.

14. Types of Investment
• Autonomous and Induced Investment
• Planned, Unplanned or Actual Investment
• Gross and Net Investment

15. Marginal Efficiency of Capital (MEC)
• Major determinant of Investment
• Expected rate of returns from additional capital stock
Algebraically,
MEC = R
1 + r
Where,
C = Supply Price
R = Prospective yield
r = MEC (DiscountingRate)

16. Determinants of Negative Slope MEC
• Operation of Diminishing Returns
• Increase in Supply Price

17. Marginal Efficiency of Investment (MEI)
• Expected rate of returns from additional capital investment.
• Covers all the expenditure except rate of interest.
Algebraically,
MEC = R
1 + r
r → including Rate of Interest

18. Measure to Raise Induced Investment
• Decrease in Indirect Tax
• Decrease in Direct Tax
• Reduce Rate of Interest
• Decrease in Wage Rate
• Government Subsidy
• Remove Copyright (Copyright)

19. Principle of Acceleration
• Introduced by J.M. Clark
• Based on the fact that demand for capital goods is derived
from demand for consumer goods
• Coefficient of acceleration:
V =∆C
∆Y