Kinds or Technical Attributes of Propensity to Consume > Marginal Propensity to Consume

When a person’s income increases, they can either spend the extra income or save it. Marginal Propensity to Consume (MPC) tells us what fraction of the extra income is spent on consumption.

"By MPC we mean consumption expenditure that is induced by a change in income." — Peterson

• Symbolically, \[MPC=\frac{\Delta C}{\Delta Y}\]

where ΔC = change in consumption and ΔY = change in income.

Table 1: Marginal Propensity to Consume (₹ crore)​

• As income rises in equal steps (₹100 crore each), consumption also rises but by smaller and smaller amounts.
• Therefore MPC falls from 0.50 to 0.25 to 0.15 as income rises.

• On the horizontal axis we take income (Y); on the vertical axis we take consumption (C).​​
• Consider two points on the consumption curve:
  At income OY = ₹150 crore, consumption is ₹100 crore (point Q).
  At income OY₁ = ₹250 crore, consumption is ₹150 crore (point T).
• The increase in income = YY₁ = ₹100 crore and the increase in consumption = QT = ₹50 crore.
• The slope of the line joining Q and T is
  \[\mathrm{slope}=\frac{QT}{YY_1}=\frac{\Delta C}{\Delta Y}=\frac{50}{100}=0.5=MPC\]
• Thus the slope of the consumption function between two points gives the value of MPC.​

1) Range of MPC (0 < MPC < 1)

• MPC is normally greater than 0 but less than 1.
• It is greater than 0 because when income increases, consumption usually increases.
• It is less than 1 because people do not spend the entire additional income; some part is saved.

2) MPC falls as income rises (generally)

• As a community becomes richer, a smaller fraction of each extra rupee is spent on consumption and a larger fraction is saved.
• Therefore, MPC tends to fall with successive equal increases in income, as shown in Table 1.​

3) MPC is higher for poor households and lower for rich households

• Poor people have many basic needs unsatisfied, so they tend to spend most of any extra income on food, clothing, housing, etc. (high MPC).
• Rich people already enjoy a high standard of living, so a larger part of additional income is saved (low MPC).

4) MPC is relatively stable in the short run

• In the short period, people’s habits, tastes and social norms do not change much.
• Therefore, for a given community, the overall MPC remains fairly stable in the short run.​

• Average Propensity to Consume (APC): ratio of total consumption to total income.
  \[APC=\frac{C}{Y}\]

• Marginal Propensity to Consume (MPC): ratio of change in consumption to change in income.
  \[MPC=\frac{\Delta C}{\Delta Y}\]

• MPC shows what fraction of extra income is spent on consumption.
• Usual range at this level: 0 < MPC < 1.
• As income rises, MPC generally falls (people save a larger part of extra income).
• MPC is higher for poor households, lower for rich households.
• APC = C/Y, MPC = ΔC/ΔY; in the short run APC > MPC, in the long run APC tends to move closer to MPC.
• Each extra rupee is either consumed or saved, so MPC + MPS = 1.