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

Saving Function (2)

As we have already understood various components of savings, now here we will understand the saving function graphically. 

Tabular explanation of Consumption function

Y(Rs)	C (Rs)	S ( Y- C)
0 20 40 60 80 100 120	30 35 40 45 50 55 60	-30 -15 0 15 30 45 60

The above table shows:

Like consumption, saving is an increasing function of the level of income, i.e. the amount of saving increases with an increase in the level of income.

Saving Function

Saving is the excess of income over consumption during an accounting year. Algebraically, saving (S) is defined as: 

S = Y – C, where Y is income and C is consumption 

Since income is either spent or saved, there is a close relationship between consumption and saving,
i.e. the part of income which is not consumed is saved and the part of income which is not saved is used in the form of consumption expenditure.

Like consumption, saving is an increasing function of the level of income, i.e. 

the amount of saving increases with an increase in the level of income.

Thus, S = f (Y)

Propensity to save

Propensity to save is the ratio between S and Y. 

It shows the level of S with respect to a given level of Y. 

Like propensity to consume, propensity to save also has two aspects:

1) Average propensity to save

2) Marginal propensity to save