MARGINAL PROPENSITY TO CONSUME

The marginal propensity to consume measures the incremental change in consumption as a result of a given increment in income. More specifically, the marginal propensity to consume is the ratio of change in consumption to the change in income.

The relationship between income and consumption is measured by the average and marginal propensities to consume. The average propensity to consume (APC) is understood as the ratio of aggregate or total consumption to aggregate income in a given period of time. Thus, the value of average propensity to consume, for any level of income, may be found by dividing consumption by income: APC = C/Y Where, C = Consumption, Y= Income. Thus mpc =   DC/  DY, DC is incremental change in consumption, DY is incremental change in income.

The ordinary relationship between income and consumption is that when income increases consumption also increases. However, this increase in consumption is less than the increase in income. In other words, in normal periods, the marginal propensity to consume is less than one and is drawn as a straight line with a slope of less than one.  The slope represents the percentage of additional disposable income that will be spent. It is less than one or unit, because it is assumed that the whole additional income is not spent, i.e. a certain percentage of it is spent and the remainder is saved.

The following table provides the information about the income, consumption and the amount of income saved:

The figures of the above table have been plotted in the following diagram. Income is represented on the horizontal axis and consumption is shown on vertical axis. Any point on the straight line is equi- distant from both the axes. If the income consumption curve P coincides with the income line, it will mean that the marginal propensity to consume is equal to one. This is normally not true. Hence, the income-consumption curve OP lies below the 45^o line through its length. The marginal propensity to consume will be measured by the tangent of the angle that the income consumption curve makes with X-axis. The marginal propensity to consume is constant throughout. However,  this need not be so and the curve may well become flatter as income rises, because as more and more consumption needs have been fulfilled, a greater proportion of an increase in income may be saved. 

            There is a level of disposable income at which the entire income is spent. This is known as a’ point of zero savings’. Below this level of disposable income, the consumption expenditure will be more than the disposable income. There may be cases where the consumer has no income at all. 

Keynes made prediction about consumption function on the basis of introspection and casual observation, not on the basis of actual studies of the behavior of consuming units. 

 Keynes hypothesized that the marginal propensity to consume lies between zero and one. People, in general, and, on an average, are disposed to increase their consumption as their income increases but by less than the amount by which income increases.  

 Keynes  postulated that:

• The average propensity to consume fall with every increase in income. 
• Saving is a luxury. 
• The rich  are expected to save a higher proportion of their income than the poor. 
• Income is the primary determinant of consumption. 
• Interest rate plays a secondary role in determining the individual consumption spending.   
• The significance of the concept of marginal propensity to consume (MPC) is that it throws light on the possible division of any extra income consumption and investment, thus, facilitating the planning of investment to maintain the desired level of income.
• The MPC is higher in the case of poor than in that of rich people, whereas in the advanced countries it tends to be at the low level.  
• The MPC is high in rich sections and low in poor section of the community. The same is true of rich nations and poor nations.