PROPENSITY TO SAVE

• It refers to eagerness, keenness or much desire to save.
• It is the urge of individual to reserve a part of his income for future use.

High propensity to save is much eagerness or high inclination to save. While low propensity to save is low urge for saving.

Type of propensity to save

• Average Propensity to Save.
• Marginal Propensity to Save.

1) Average propensity to save (APS)

• APS is the proportion of one’s income that is saved.
• It is total amount saved divided by total income.

2) Marginal propensity to save (MPS)

• MPS is extra or additional saving that occurs as a result of an increase in income. In other words,
• It is a change in saving as a result of a change in income.
• Simply, it is a change in saving divided by a change in income.

Saving schedule, function and slope

1) Saving Schedule

It is a table that shows specific amount saved at different levels of income. It is obtained from the assumption that saving equals current income minus consumption. It is also in line with saving’s definition: a part of current income not used but reserved for future use.

Note: SSCE students should ignore this section of there is time constraint.

2) Saving function

It is a concept (term) that relates amount saved to income. When income is zero, saving is negative. It is possible to save a part of borrowed money, but it is not a constant tread or a good behaviour. It is therefore generally assumed that whenever income is zero, saving is not only nil, but people either borrow (negative saving) for survival or they withdraw from previous saving. Alternatively, they sell their property in order to be alive. The amount borrowed or withdrawn is termed as ‘Negative Saving’. The graphical representation of the data in table 1 is shown in figure 2.

3) Saving Function’s Slope

The slope of the saving function or saving line marked ‘S’ in figures 3 and 4 is mainly determined by the MPS. If the MPS is quite small, the saving function is less steep as shown in figure 3. And if it is large or almost one, it is therefore quite steep as illustrated in figure 4.

It is important to note that saving, as a function of income, is positively related to it. That is, as income increases, saving also rises and vice versa. This is shown in the saving schedule of table 1. Total saving is equal to all incomes not spent on consumption.

The above imply that if a person’s MPS is very low, his saving function will be less steep as shown in figure 3. But if his MPS is very high, his saving function will be very steep as shown in figure 4 above.