Average Propensity to Consume and Marginal Propensity to Consume

Average Propensity to Consume (APC)

The average propensity to consume (ACP) is defined as a ratio of total consumption to total income in a given period of time. It is calculated by dividing the amount of consumption (C) by disposable income (Y) for any given level of income.

Symbolically,

APC= C/Y

Where, C= Consumption; Y= Income

For example, when the disposable income of the nation is $180 and consumption expenditure is $170, we can calculate APC as

APC= 170/180

= 0.92 or 92%

This shows that out of the total disposable income for the year, 92% will be used for consumption while, the rest is used for saving. The APC declines as income increases because the proportion of income spent on consumption decreases.

This can be explained with the diagram below

In the figure, CC represents the consumption curve. At point E,

APC=EY/OY

Thus, APC implies a point on the curve C which indicates the ratio of income and consumption. The CC curve is made up of a series of such points.

Important Points of APC:                      

1.     APC is more than 1 (APC>1) when aggregate income is less than aggregate consumption.

2.     APC is equals to 1 when aggregate income is equal to aggregate consumption.

3.     APC is less than 1 when aggregate income is greater than aggregate consumption.

4.     APC can never be zero because consumption can never be zero at any level of income.

Marginal Propensity to Consume (MPC)

The marginal propensity to consume (MPC) is defined as the ratio of the change in consumption to the change in income. It is also referred to as the rate of change in the APC that occurs as a change in income. It is calculated by dividing the change in consumption (ΔC) by the change in income (ΔY).

Symbolically,

MPC=ΔC/ΔY

Where, ΔC= Change in consumption; ΔY= Change in income

For example, if

This implies that with an increment of one extra dollar of disposable income, the household will spend $83 and save $17.

The marginal propensity to consume can be explained using the diagram below

In the diagram, MPC is measured by the slope of the consumption curve. Here,

MPC=NQ/RQ

Generally, it is assumed that value of MPC for the richer sector of the economy would be less than that for the poorer section. This means, if income increases by $1 for both the parties, the propensity to consume would be less for the richer section than the poorer section.

Important Points of MPC:

1. The value of MPC is between 0 and 1. If the entire additional income is consumed, i.e. AS=0, then MPC=1. If the additional income is saved i.e. AC=0 then MPC=0.

2. MPC of poor is more than that of rich because poor people spend their most of the income is consumption as their most of the needs are still unfulfilled.

3. MPC of developing countries is high than MPC of developed countries.

4. MPC falls with successive increase in income.

Difference Between APC and MPC:

APC	MPC
i. It is the ratio of consumption to corresponding levels of income.	a. It is the ratio of change in consumption to change in income.
ii. It can be more than one as long as consumption is more than national income.	b. It cannot be more than one as change in consumption cannot be more than change in income.
iii. When income increases, APC falls but at lower rate.	e. When income increases, MPC falls at faster rate.
iv. APC=C/Y	d. MPC=dC/dY

Some Parts are adopted from: www.businesstopia.com