Question

How is marginal propensity to consume related to marginal propensity to save?

Answer 1

The relationship between MPC and MPS is complementary, meaning their sum is always equal to one (1). Whenever an individual or an economy receives an incremental increase in income, that additional income can only be used in two ways: it is either spent on extra consumption or set aside as extra savings. Because the entire new income is divided between these two choices, the proportion spent plus the proportion saved must equal the whole.

This economic relationship is derived from the income identity, which states that any change in income (ΔY) equals the sum of the change in consumption (ΔC) and the change in saving (ΔS):

ΔY = ΔC + ΔS

To express this in terms of propensities, divide both sides of the equation by the change in income (ΔY):

`(ΔY)/(ΔY) = (ΔC)/(ΔY) + (ΔS)/(ΔY)`

Since `(ΔC)/(ΔY)` is the Marginal Propensity to Consume (MPC) and `(ΔS)/(ΔY)` is the Marginal Propensity to Save (MPS), substituting these terms establishes the final relationship:

1 = MPC + MPS

This identity implies that MPC and MPS have a strict inverse relationship. If people choose to consume a larger fraction of their additional income (higher MPC), the fraction left over for savings automatically shrinks (lower MPS). Consequently, both values are bounded as positive fractions that always lie between zero and one.