Question

Explain the relation between APC and MPC.

Answer 1

The relationship between Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) can be as follows:

1. APC is the ratio of total consumption expenditure to total income, expressed as APC = `C/Y`.
2. MPC is the ratio of the change in consumption to the change in income, expressed as MPC = `(ΔC)/(ΔY)`.

The key points about their relationship are:

• In the short run, APC is greater than MPC (APC > MPC).
• In the long run, APC equals MPC (APC = MPC).

The reason behind this is that in the short period, people do not spend the entire increase in income because consumption takes time to adjust to income changes, making MPC generally lower. Over the long run, the consumption function adjusts itself to changing levels of income, so consumption and income tend to increase proportionally, leading to APC being equal to MPC.