Question

What are the causes of the fall in MPC with the increase in Income?

Answer 1

The causes of the fall in the Marginal Propensity to Consume (MPC) with the increase in income are explained as follows:

1. Fulfillment of Basic and Important Wants: As income increases, people first satisfy their essential and important needs. Once these basic wants are fulfilled, the additional income increment is less likely to be spent on consumption and more likely to be saved, leading to a decline in MPC.
2. No Change in Habits in the Short Period: Consumption habits tend to remain stable in the short run despite increases in income. This stagnation in consumption patterns causes the fraction of additional income spent (MPC) to fall.
3. Consumption Expenditure and Level of Income in the Past: Past consumption and income levels influence current consumption behavior. If people have already adjusted their consumption to a higher income level, the extra income received now may be saved rather than spent.
4. Uncertainty of Future: When income rises, people may also become more cautious about spending due to uncertainties about the future, which encourages saving rather than consuming additional income.