Question

Explain that sum total of c and s is equal to 1.

What is the relationship between MPC and MPS?

Explain MPC and MPS their relationship.

Discuss, in brief, the relationship between MPC and MPS.

Answer 1

There is a simple relationship between the consumption and saving propensities. APC and APS must add to unity, and so must MPC and MPS. It is so because income can be either spent on consumption or it can be saved. Let us explain it:

Since income is either consumed or saved, i.e.,

C + S = Y

∴ `C/Y+S/Y=Y/Y` (Dividing both the sides by Y)

or APC + APS = 1

It also follows that since additional income is used either in increasing consumption or in increasing saving, i.e.,

ΔC + ΔS = ΔY

∴ `(ΔC)/(ΔY)+(ΔS)/(ΔY)=(ΔY)/(ΔY)` (Dividing both the sides by ΔY)

or MPC + MPS = 1

Thus, the sum of MPC and MPS is always equal to 1 at all levels of income. Therefore,

MPC = 1 − MPS

and MPS = 1 − MPC