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.

What is Fundamental Psychological Law ?

Answer :

This law is propounded by Keynes. It states that as income of the people increases, their consumption also rises. But the entire increase in income is not converted into consumption. A part of it is often saved. Also the rate at which consumption increases is often less than the rate at which income increases.

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 expenditure ?

Answer :

The amount of money spent by consumer on the purchase of goods and services in order to satisfy their wants directly is called consumption expenditure. Consumption expenditure mainly depends on income, and are directly related, it increases as income increases.

What is Aggregate Demand and its components ?

To know read -  Aggregate Demand and its Components

What is macroeconomics? State its vital components

Answer :

Macroeconomics refers to the study of economic problem or economic issues at the level of an economy as a whole. In this the focus shifts from maximization of individuals gain (as in microeconomics) to maximization of social welfare. The central issues in this relate to the overall level of employment, growth rate of national output, the general price level, and stability of the economy.

The vital components of Macroeconomics are:

1. Theory related to Equilibrium level of output and Employment : It studies how equilibrium is struck when Aggregate supply (AS) = Aggregate Demand (AD).

2. Theory related to Inflationary and Deflationary Gap in the economy : It studies how departure from full employment equilibrium output causes inflationary or deflationary gap.

3. Theory of Multiplier : It analysis the process of income generation by investment expenditure in the economy.

4. Money supply and Credit Creations : It studies the components of money supply and role commercial banks in money supply through credit creation.

5. Fiscal and Monetary Policies : Budgetary and monetary measures to correct the situations of inflationary and deflationary gap.

6. Government Budget : It focuses on the measurement and impact of budgetary deficits in the economy.

7. Exchange rate and BOP : It analyses how exchange rate is determined in the international money market and how BOP impacts the level of economic activity in the domestic economy.

What is the Difference between Microeconomics and Macroeconomics

to know about this read - Difference between Microeconomics and Macroeconomics