Question

Explain MPC and illustrate these through a numerical example.

Answer 1

Marginal propensity to consume refers to the ratio of change in consumption to change in income.

Symbolically,

MPC(c) = `(DeltaC)/(DeltaY)` 

where ΔC refers to change in total consumption and ΔY refers to change in income.

When total income increases from ₹ 1,000 crore to ₹ 1,100 crore, and as a consequence, consumption expenditure increases from ₹ 900 crore to ₹ 980 crore, the MPC will be 0.8.

MPC = `(DeltaC)/(DeltaY)` 

= `(980-900)/(1100-1000)`

= `80/100`

= 0.8

The slope of the C curve indicates marginal propensity to consume.