The savings function describes the relationship between total household saving and the level of national income. It illustrates how much money households plan to set aside at different income levels, based on their spending habits.

Formula: S = −a + (1 − b)Y = −a + MPS × Y
(Where: a = autonomous consumption, b = marginal propensity to consume (MPC), and (1 − b) = marginal propensity to save (MPS))

Key features:

• The savings function is derived from the consumption function.
• At low income levels, the intercept (−a) is negative, which indicates dissaving (spending more than income).
• The slope of the function is the MPS, representing the portion of each extra unit of income that is saved.
• In the circular flow of the economy, saving is viewed as a leakage because it is money removed from the consumption spending cycle.
• At the economy’s equilibrium, planned saving equals planned investment (S = I).
• Changes in factors like wealth, consumer confidence, or interest rates cause the savings function to shift.
• It is a fundamental tool for analyzing how saving and investment affect national income levels.