What is Marginal Propensity to consume? How is it related to Marginal Propensity to Save?

Answer:

The marginal propensity to consume is the ratio of change in consumption expenditure to a change income.

Marginal Propensity to consume = Change in Consumption / Change in Income

MPC = ∆C / ∆Y

The marginal propensity to save is the ratio of change in saving to a change income.

Marginal Propensity to save = Change in saving / Change in Income

MPS = ∆S / ∆Y

Aggregate of marginal propensity to consume and marginal propensity to save is equal to one

MPC + MPS = 1

Also read : 

Consumption function

Saving function

What is consumption Function?

Answer :

Consumption function shows the functional relationship between the desired consumption expenditure and income. The relationship can algebraically expressed as C=f(y), where C stands for consumption expenditure, f is the function and Y is the income. There is a direct relationship between income and desired or planned consumption expenditure, the level of consumption increases with increase in income.

To know more about this topic also read - Consumption Function

What is consumption Function ?

Answer :

Consumption function shows the functional relationship between the desired consumption expenditure and income. The relationship can algebraically expressed as C=f(y), where C stands for consumption expenditure, f is the function and Y is the income. There is a direct relationship between income and desired or planned consumption expenditure, the level of consumption increases with increase in income.

To know more about this topic also read - Consumption Function

Tabular explanation of Consumption function

Consumption function depends on income. It is directly related to the level of income. It increases as income increases. However, there is always some minimum level of C (consumption) irrespective of level of Y. Also, increase in C tends to lag behind the increase in Y. Because, after certain level of Y is reached, people start saving a part of Y. As shown below:

Y(Rs)	C (Rs)
0 20 40 60 80 100 120	30 35 40 45 50 55 60

The above table shows:

1) 30 is the minimum level of C even when Y = 0. Survival requires that C be at least 30 even with zero income. The level of consumption at zero level of income is called autonomous consumption.

Consumption Function

The amount of money spent by the people on the purchase of goods and services in order to satisfy their wants directly is called consumption expenditure. 

Consumption function or propensity to consume shows the relationship between total desired consumption spending by the households and the factors that determine it. The factors that can affect consumption of a person are income, rate of interest, wealth, liquid assets, future expectation about income, consumer credit, distribution of income, etc.

However among all the factors mentioned above Income is considered to be a major factor of propensity to consume.

Keynesian theory of consumption function, therefore, shows the functional relationship between the desired consumption expenditure and income.

Propensity to consume has two aspect:

1) Average propensity to consume

2) Marginal propensity to consume