Marginal propensity to consume: The ratio of change in consumption (ΔC) to change in income (ΔY) is called marginal propensity to consume. Literally marginal means additional and propensity to consume means desire (or urge) to consume. Thus MPC is the ratio of additional consumption to additional income. It indicates the proportion of additional income that is being spent on additional consumption.
so,
MPC = ΔC/ΔY
Where,
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 diagram.
If income and consumption are:
| Income in Rs (Y) |
Consumption Expenditure in Rs (C) |
| 200 |
20 |
| 250 |
40 |
Then MPC = ΔC/ΔY = 20/50 = 0.4
Also, MPC can be explained with the given diagram.
In the diagram, x-axis represents national income and y-axis represents consumption level.
So, MPC = BC/AC
The relationship between MPC and MPS can be explained as –
The sum of MPC and MPS is equal to unity i.e., MPC+MPS = 1
We know that income (Y) is either spent on consumption (C) or saved (S). Symbolically:
Y = C + S
or, ΔY = ΔC + ΔS
Dividing both sides by ΔY
ΔY/ ΔY = ΔC/ΔY + ΔS/ΔY[ΔS/ΔY = MPS]
Or, 1 = MPC + MPS
Or, MPC = 1 – MPS
Or, MPS = 1 – MPC
So, the sum of MPC and MPS is always equal to unity.
