Question

Distinguish between average propensity to consume and average propensity to save. How are the two interrelated?

Show the relationship between APC and APS.

What is the relationship between average propensity to consume (APC) and average propensity to save (APS)?

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 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

In our example, APC = 0.9 and APS = 0.1. So, APC + APS = 0.9 + 0.1 = 1. Since the sum of APC and APS is always 1 at all levels of income, it is possible to find APC or APS as the case may be, if the value of the other is given.

Thus,

APC = 1 − APS

and APS = 1 − APC

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

Answer 2

Basis	Average Propensity to Consume (APC)	Average Propensity to Save (APS)
Meaning	Proportion of income spent on consumption.	Proportion of income saved.
Formula	APC = `C/Y` (Consumption ÷ Income)	APS = `S/Y` (Savings ÷ Income)
Value Range	Between 0 and 1 (can be 1 or more if there’s dissaving)	Between 0 and 1 (can be negative if saving is negative)
Behavior with Income Rise	Tends to fall as income increases.	Tends to rise as income increases.
Focus	Measures consumption behavior.	Measures saving behavior.