Question

What percentage of last month's income did you spend?  How much more would you have spent if you won a $1,000 lottery prize?  Would your average and marginal propensities to consume differ? Are your consumption habits different from a year ago? Is the coronavirus a reason for that difference?

Answer 1

There is a general trend of spending income only on necessities. And thus I spent only 30% of last month's income in order to save for unforeseen circumstances.

I would have spent atleast 10% more in total if I had won a $1,000 lottery prize as that would have increased by discretionary expenditure, while the rest of the lottery prize, I would have saved in a high interest bearing security.

Average propensity to consume is defined as the ratio of income which is allocated for consumption vs. saving. Thus I would consume more because of the unexpected lottery win but I would save a much higher percent.

Marginal propensity to consume in view of the additional income would also be high, but the savings component would be more. Thus the average and marginal propensity to consume would differ as on average I would spend far less.

Consumption habits are different from a year ago as there is more expenditure done on necessary items, vs. earlier a major part of consumption expenditure was on hospitality, travel and leisure.

The pandemic is the reason for that difference led by the unprecedented cases and as demand is low, there is no surety of where the next income base is going to come from and whether the income base is going to increase.