Question

Explain APC and illustrate this through a numerical example.

Answer 1

The average propensity to consume refers to the proportion of income devoted to consumption. It is the ratio of total consumption to total income. Thus, average propensity to consume defines the relationship between total consumption and total income.

Symbolically,

APC = `C/Y`

Where C stands for total consumption expenditure and Y is total income.

When the level of income is ₹ 1000 crore and ₹ 900 crore is devoted to consumption, the average propensity to consume will be 0.9.

APC = `C/Y`

= `(₹900  "crore") /(₹ 1000  "crore")`

= 0.9

The value of APC at any given level of income is measured by the ratio of vertical distance (C) and horizontal distance (Y) at any pour in the C curve.