Define Average and Marginal Propensity to consume. Explain with a numerical example.

Answer :

The average propensity to consume (APC) refers to the proportion of income devoted to consumption. It defines the relationship between total consumption and total income. APC = C/Y Marginal propensity to consume refers to the ratio of change in consumption to change in income.

MPC = ∆C / ∆Y

For example :

If income (Y), is Rs. 100 crore and consumption (C) is Rs. 80crore, 

the APC = C / Y
APC = 80 / 100 = 0.8 or 80 %

This indicates that 80 per cent of the income is spent by way of consumption expenditure in the economy.

If income (Y), increases to Rs. 1200 crore and consumption expenditure increases to Rs. 900 crore,

then,

MPC = ∆C / ∆Y

MPC = 900 - 800 / 1200 – 1000

= 100 / 200

= 0.5

it means that change in income by Rs. 200 crore has caused a change in consumption by Rs. 100 crore.