Like aggregate demand, however, aggregate expenditure concerns planned spending, that is we live in the future but act in the present. In this section the influences on the components of aggregate expenditure at a given price level are assessed. In a sense, consumption is 'negative production' in that 'normal' goods and services are destroyed in the act of consumption. Savings is the difference between disposable income and consumption. The primary factor affecting consumption and savings is disposable income which equals income earned less taxes plus transfers.
Consumption involves the purchase of goods and services by households.
Savings equals disposable income less consumption. Households can thus do two things with its disposable income. They can spend or save. All things being equal, as disposal income increases, consumption and savings increase. The relationship between disposable income and consumer expenditure is called 'the consumption function '.