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Concept
Marginal propensity to consume
Summary
In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). The proportion of disposable income which individuals spend on consumption is known as propensity to consume. MPC is the proportion of additional income that an individual consumes. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the household cannot spend more than the extra dollar (without borrowing or using savings). If the extra money accessed by the individual gives more economic confidence, then the MPC of the individual may well exceed 1, as they may borrow or utilise savings.
The MPC is higher in the case of poorer people than in rich.
According to John Maynard Keynes, marginal propensity to consume is less than one.
Mathematically, the function is expressed as the derivative of the consumption function with respect to disposable income , i.e., the instantaneous slope of the - curve.
or, approximately,
where is the change in consumption, and is the change in disposable income that produced the consumption.
Marginal propensity to consume can be found by dividing change in consumption by a change in income, or . The MPC can be explained with the simple example:
Here ;
Therefore, or 83%.
For example, suppose you receive a bonus with your paycheck, and it's 500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit, your marginal propensity to consume will be 0.8 ().
The marginal propensity to consume is measured as the ratio of the change in consumption to the change in income, thus giving us a figure between 0 and 1.
Official source
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