Question

Explain the concepts of saving function.

Answer 1

Meaning

Saving is defined as the excess of income over consumption expenditure. The concept of saving is closely related to the concept of consumption. Saving is the part of income that is not consumed. Generally, as the level of income increase, saving also increases and vice versa.

Saving Function

Saving function or the propensity to save expresses the relationship between saving and the level of income. It is simply the desire of the households to hoard a part of their total disposable income.

Symbolically, the functional relation between saving and income can be defined as S= f(Y).

We know,

Y= C + S;

Thus, S= Y-C;

Where, Y= Income; S= Saving; C= Consumption

The equation shows that the remaining amount after the deduction of total expenditure from total income is saving. Thus, saving is that part of income which is not spent on consumption

Attributes of Saving Function

Saving function or propensity to save has two major attributes:

• Average Propensity to Save (APS)
• Marginal Propensity to Save (MPS)