Question

Why does MPC generally fall?

Answer 1

The Marginal Propensity to Consume (MPC) generally falls because as income increases, the increase in consumption is less than the increase in income. In other words, people spend a smaller proportion of each additional unit of income as their total income grows. This happens due to several reasons:

1. Fulfillment of Basic and Important Wants: As people become richer, their basic needs are satisfied, so additional income is less likely to be spent on consumption.
2. Reduced Consumption Rate Among the Rich: Rich communities tend to have a lower MPC because they save a larger portion of their additional income, while poorer communities consume a higher proportion, as most of their basic requirements remain unsatisfied.
3. Psychological and Habitual Factors: Consumption habits and psychological factors tend to remain stable in the short term, but as income rises over time, consumption increases at a slower rate compared to income.
4. Falling Marginal Consumption with Income Growth: With successive increases in income, the MPC falls, meaning the percentage of additional income spent decreases, leading the consumption curve to flatten as income rises.
5. Income-Consumption Relationship: The increase in consumption is less than the increase in income due to the inclination to save part of the additional income, which contributes to a fall in MPC with rising income.