Consumption Propensity

You want to splurge on a 1,000$ all inclusive vacation to Cuba for yourself and your girlfriend.

Will you take 1,000$ out of your savings account and buy the tickets? That would make you feel guilty the entire trip now wouldn't it.

What if you have an extra 1,000$ a month from your salary that is not going to essentials? you can use it for a vacation this time instead of saving / other purchases? will you go now?

What if you collected your tax refund for 5,000$ today?  yes pack your bags babe were off to Varadero.

Consumers have a different propensity to consume depending on the source of the funds.

Total Consumption = X * savings + Y * income + Z * bonus
where X < Y < Z

It is easy to spend away a bonus, more difficult to spend from income, and the most difficult to dip into savings.

But money is money. It should not matter where it came from. The vacation is going to cost the same no matter what.