Households are the owners of the factors of production (natural resources, labour, capital and entrepreneurship) and they earn an income by selling the services of these factors of production to firms. They then use this income buy goods and services. Consumption spending consists of an induced part and an autonomous part. Induced consumption is determined by the marginal propensity to consume. The marginal propensity to consume is less than one indicating that an increase in income increases consumer spending, but the increase in consumer spending is less than the increase in income. What is not consumed is saved.
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