Marginal And Average Propensity To Consume Pdf

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An Influence of Relative Income on the Marginal Propensity to Consume: Evidence from Shanghai

The consumption function is a relationship between current disposable income and current consumption. It is intended as a simple description of household behavior that captures the idea of consumption smoothing.

We typically suppose the consumption function is upward-sloping but has a slope less than one. So as disposable income increases, consumption also increases but not as much. More specifically, we frequently assume that consumption is related to disposable income through the following relationship:. A consumption function of this form implies that individuals divide additional income between consumption and saving. Figure In symbols, we write the consumption function as a relationship between consumption C and disposable income Y d :.

Here a represents autonomous consumption and b is the marginal propensity to consume. We assume three things about a and b :. The second assumption means that the marginal propensity to consume is positive. By the third assumption, the marginal propensity to consume is less that one. What happens to the remainder of the increase in disposable income?

Since consumption plus saving is equal to disposable income, the increase in disposable income not consumed is saved. More generally, this link between consumption and saving S means that our model of consumption implies a model of saving as well. We can also graph the savings function. The savings function has a negative intercept because when income is zero, the household will dissave.

The savings function has a positive slope because the marginal propensity to save is positive. Economists also often look at the average propensity to consume APC , which measures how much income goes to consumption on average. It is calculated as follows:. When disposable income increases, consumption also increases but by a smaller amount.

This means that when disposable income increases, people consume a smaller fraction of their income: the average propensity to consume decreases. An increase in disposable income reduces the first term, which also reduces the APC.

Previous Section. Table of Contents. Next Section. We assume autonomous consumption is positive. Households consume something even if their income is zero.

If a household has accumulated a lot of wealth in the past or if a household expects its future income to be larger, autonomous consumption will be larger.

It captures both the past and the future. We assume that the marginal propensity to consume is positive. The marginal propensity to consume captures the present; it tells us how changes in current income lead to changes in current consumption. Consumption increases as current income increases, and the larger the marginal propensity to consume, the more sensitive current spending is to current disposable income.

The smaller the marginal propensity to consume, the stronger is the consumption-smoothing effect. We also assume that the marginal propensity to consume is less than one. This says that not all additional income is consumed. When a household receives more income, it consumes some and saves some.

Average Propensity to Consume

Propensity to save , in economics, the proportion of total income or of an increase in income that consumers save rather than spend on goods and services. The average propensity to save equals the ratio of total saving to total income; the marginal propensity to save equals the ratio of a change in saving to a change in income. The sum of the propensity to consume and the propensity to save always equals one see propensity to consume. Propensity to save Article Additional Info. Print Cite verified Cite.

Average propensity to consume refers to the ratio of consumption expenditure to the corresponding level of income. In Table 7. APC falls to 1 when income rises to Rs crores. The value of APC further falls to 0. In Fig 7.

The Keynesian consumption function expresses the level of consumer spending depending on three factors. This suggests consumption is primarily determined by the level of disposable income Yd. Higher Yd leads to higher consumer spending. This model suggests that as income rises, consumer spending will rise. However, spending will increase at a lower rate than income.


The average propensity to consume is the fraction of the their total income that consumers are spending. Remember marginal propensity to consume is how much you spend out of each additional dollar. But the average propensity to consume is your total overall spending as a fraction of your total overall income.


The Propensity to Consume and the Multiplier

Policymakers often consider temporarily redistributing income from rich to poor households to stimulate the economy. This is based in part on the idea that poor households spend a larger share of their income than rich ones do. However, ample evidence suggests that the difference in spending between these groups is significantly smaller than commonly assumed. A second assumption is that redistribution through policy is more efficient than through capital markets. Whether this is true is important to consider when proposing this type of stimulus policy.

Propensity to save

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The Stimulative Effect of Redistribution

3 Comments

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  2. Paul G. 06.02.2021 at 19:06

    The consumption function is a relationship between current disposable income and current consumption.

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