November 27, 2010

Marginal Propensity to Consume vs. Marginal Propensity to Save

No two people have exactly the same spending pattern. One may spend more on food while the other may crunch on  food budget and spend on clothing and other personal needs.  Spending pattern could change with increases in personal or household income. This is the essence of the analysis on marginal propensity to consume (MPC)  and marginal propensity to save (MPS).

The marginal propensity to consume (MPC) is the amount of extra consumption generated by an extra dollar of income. Graphically, it is given by the slope of the consumption schedule.  A steep slope means a high MPC and a flat one means a low MPC.

The marginal propensity to save (MPS) is the extra saving generated by an extra dollar of  income. Graphically, it is given by the saving schedule.

Since what is saved is the same thing as what is not consumed, savings and consumption schedules are mirror twins. Mathematically, the following equations are true:

               (a) Savings + Consumption = Disposable Income
               (b) MPS = 1 -  MPC

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