The consumption function has two technical attributes or properties which are given below – (i) Average Propensity to Consume (APC) and (ii) Marginal Propensity to Consume (MPC).
Hi friends, in today’s article we are going to know about the Average and Marginal Propensity to Consume. So let’s discuss in details.
Table of Contents
What is Average Propensity to Consume (APC)?
The average propensity to consume may be define as the ratio of consumption expenditure to any particular level of income. The average propensity to consume is measured by dividing consumption expenditure by income. Symbolically,
Average propensity to consume formula –
APC = C/Y
C = Consumption and
Y = Income.
The average propensity to consume declines as income increases because the proportion of income spend on consumption decreases. In the following figure the APC is any point on the ‘C’ curve.
In the figure, point ‘R’ measures the APC of the ‘C’ curve, which is OC1/OY1. The flatting of the ‘C’ curve to right to shows declining APC.
What is Marginal Propensity to Consume (MPC)?
Marginal propensity to consume is define as the ratio of the change in the consumption to the change in income or as the rate of change in the APC as income changes. The Marginal propensity to consume is found by dividing change in consumption by a change in income. Symbolically,
Marginal propensity to consume formula –
MPC = ΔC/ΔY
ΔC = Change in consumption and
ΔY = Change in Income.
Diagrammatically, the Marginal Propensity to Consume is measured by the slope of consumption curve (C) which is shown in the below figure –
In the above diagram by NQ/RQ, where NQ is change in consumption (ΔC) and RQ is the change in income (ΔY) or C1C2/Y1Y2.
Relation between MPC and APC
The marginal propensity to consume and average propensity to consume or significance of MPC and APC are explain below –
The Marginal Propensity to Consume (MPC) is the rate of change in the APC. When income increases the MPC falls but more than APC .
On the other hand, when income falls MPC rises and the APC also rises but a smaller rate than MPC. Therefore MPC > APC. Keynes in his concern primarily with the MPC for his analysis is related to short run only.
The importance of MPC is more in the multiplier theory. Higher the MPC multiplier and vice-versa. The Keynesian analysis that the MPC is positive but less than unity (0< MPC < 1) is of great analytical and practical significance.
The MPC is law in the case of rich people and high incase of poor people. Therefore, in the UDCs the MPC is higher than the advances countries.
So friends, this was the concept of APC and MPC. Hope you get the full details about it and hope you like this article.
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