What is marginal propensity to consume? How is it related to
marginal propensity to save?
Marginal propensity to consume refers to the ratio of change in
expenditure due to the change in disposable income (income after
deducting taxes). In other words, MPC measures how consumption
will vary with the change in income.
ΔC = Change in consumption
ΔY = Change in income
For example, if income increases from Rs 200 crores to Rs 250
crores and consumption increases from Rs 20 crores to Rs 40
crores, it implies that 0.4 is the MPC or 40% increase in the
income is being consumed.
This can further be explained with the help of a table and a
If income and consumption are:
Income in Rs (Y)
Expenditure in Rs (C)
Also, MPC can be explained with the given diagram.
In the diagram, x-axis represents national income and
y-axis represents consumption level.
The relationship between MPC and MPS can be explained as
Y = C + S (Assuming that the income earned
is either consumed or saved)
Or, ΔY =
Dividing both sides by ΔY
Or, 1 = MPC + MPS
Or, MPC = 1 - MPS
Or, MPS = 1 - MPC
So, the sum of MPC and MPS is always equal to unity.
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