Concepts of savings, investment and consumption.

SAVINGS: are made up of disposable incomes which are not spent on consumer goods and services. In other words, saving refers all or part of income which are not spent immediately but reserved for future purpose.

Saving involves forgoing some present consumption. Money which is saved constitutes withdrawal from the circular flow of income. However, part of savings may come back into income flow through investments.

TYPES OF SAVING

1. Personal saving
2. Corporate saving
3. Government saving

FACTORS THAT DETERMINES THE PERSONAL SAVING

1. Rates of interests
2. Political stability
3. Size of income
4. Government policy
5. Sense of responsibility.

INVESTMENT

Investments involve expenditure on capital goods. It may be defined as expenditure on physical assets which are not for immediate consumption but for the production of consumer and capital goods and services.

TYPES OF INVESTMENTS

1. Individual investment
2. Corporate investment
3. Government investment.

FACTOR THAT DETERMINES INVESTMENT

1. Saving
2. Level of income
3. Rates of taxation
4. Interest rate
5. Change in technology
6. Profit earned
7. Political climate

CONSUMPTION

Consumption means making use of resources to satisfy human wants. Consumption can also be defined as the use of goods and service for the direct satisfactory of human wants.

Consumption, in relation to National income, would mean all expenditure on goods and services which are meant for current use in direct satisfaction of wants. Consumption is part of the income which is spent on goods and services at a particular time. It is depended on the level of income. As income increases, consumption also increases.

TYPES OF CONSUMPTION

1. Durable goods e.g. houses, motor vehicle etc.
2. Non-durable goods e.g. food, clothing, water etc.
3. Services e.g. Legal fees, medical fees, entertainment fees, educational fees

FACTOR THAT DETERMINE TO LEVEL OF CONSUMPTION

1. Level of income
2. Availability of credit facilities
3. Rate of taxation
4. Profit earned
5. Change in disposal
6. Attitude of saving

RELATIONSHIP BETWEEN INCOME, CONSUMPTION, SAVINGS AND INVESTMENT.

INCOME, CONSUMPTION AND SAVING ARE RELATED

This is represented by the formula;

Y =C + S

Where Y = income

C = consumption and expenditure

S = savings.

The amount of income earned determines to a large extent of the level of consumption of an individual as well as the amount which can be saved.

The higher the level of income, the higher the level of consumption and savings and vice-versa, other things remaining equal.

Again, income, consumption and investment are related

Thus, Y= C+ I, where

Y = income

C =consumption expenditure

I = investment expenditure

This relationship is based on the fact that all expenditure in the economy can be regarded as either   consumption or expenditure or investment expenditure.

If Y = C+S and Y = C+ I, then S =I other things remaining equal. The above relationship between savings and investment stems from the fact that all investment emanate from saving which have been made in one way or the other by individuals, firms and governments.

Assignment (Post your answer and question title using the box below for evaluation and discussion):

The table below represent a traveller’s consumption of bottles of coca cola. Study the table carefully and answer the question that follows:

1. Complete the missing figures D,E,F,G and H
2. Draw the demand curve for the traveller’s consumption of Coca-Cola.
3. Explain the law of diminishing marginal utility as the basis for the slope of the traveller’s demand curve.

AVERAGE PROPENSITIES TO CONSUME AND TO SAVE

1. AVERAGE PROPENSITY TO CONSUME (APC): this is the ratio of consumption to income. Also, it is the fraction of the National Income consumed, that is,

APC = Total National consumption    = C

Total National Income               Y

The average propensity to consume decrease with increasing income levels. At low levels of income, an individual may consume almost all his income. In this case the APC will be close to 1. But as income increases, the proportion of income consumed will be less.

Example 1:  Calculate the average propensity to consume, if the national income is N20m and the total National consumption is N15m.

Solution:

APC = C

Y

APC = N15m     = 0.75

N20m

1. If the national income is 150m and the average propensity to consume is 0.2. calculate the total National Consumption.

Solution:

C = Y X APC

= N150m X0.2

= N30

1. Average propensity to save (APS): this is defined as measure of the proportion of income which is saved (not spent on consumption) i.e. ratio of saving to total income .It tells the expected amount of savings at different levels of income. The average propensity to save increases with increases in income. As the level of income increases one is able to save more money.

Note: APC + APS = 1.

APS = Total National Saving   = S

Total National Income     Y

Example:

If total National saving is 50m and the total national income is 500m, then the APS will be thus;

APS = S

Y

APS = N50m

N500m   APS = 0.1

Example 2:

If an individual earns an annual income of N6,000.00 and spends N4,000.00 on the consumption of goods and service, calculate his average propensities to consume and to save.

Solution

Total income = N6000.00

Consumption expenditure = N4,000.00

APC = C    = 4000            =2/3     = 0.67

Y       6000                         = 67%

Since APC + APS = 1

APS= 1 –APC=1- 0.67 = 0.33 or 33%

Expected savings = N6,000.00 – N4,000.00 = N2,000.00

APS = N2000.00           = 0.33

N6000.00