Average Propensity To Consume:

Average Propensity to Consume:

The ration of aggregate consumption to aggregate income is known as average propensity to consume.

APC = C/Y or C:Y

Supposing that the income level is Rs. 100 Billions, out of this consumption is Rs. 80 Billions on the
consumption function as shown in the above Diagram;

Therefore, APC = 80/ 100 = 0.8

As consumption function increases APC falls gradually. This can be shown by the following
calculations of APC on different points in above diagram;

At point E: 40 / 20 = 2
At point G 60 / 60 = 1
At point H 80 / 100 = 0.8

As the consumption function increases APC falls because increases consumption also increases but
increase in consumption is less than the increase in income, and the gap between C and Y (i.e Savings)
widens at higher levels of income.

Marginal Propensity To Consume:

Marginal Propensity to Consume:
Consumption and income both are variable (vary with the passage of time). Marginal propensity to
consume is the ratio of change in consumption to change in income.

MPC = Change in Consumption / Change in Income

For example: If a income level in a country increases from Rs. 100 Billions to Rs. 120 Billions and
consumption increases from Rs. 80 Billions to Rs. 90 Billions, as shown in above diagram, then;

Change in consumption = 10
Change in income = 20

thus;
MPC = 10 / 20 = 0.5

The concept of marginal propensity to consume leads us to the concept of marginal propensity to save
as 1 – MPC = MPS

MPS = Change in saving / Change in Income

This is so as the next increment in income is always divided between consumption and saving. Or in
simple words, as our income increases we either consume or save, as it increases more our savings
increases more, because the part of income which is more than that which we spent on consumption is
our savings.
MPS = 1 – 0.5 = 0.5
MPS = 10 / 20 = 0.5

The concept of MPC and APC are brought together in a table below:

Income (Y) Consumption ( C ) APC ( C/ Y) MPC ( Change in C / Change

in Y)
20 40 2 0.5
40 50 1.25 0.5
69 60 1 0.5
80 70 0.88 0.5
100 80 0.8 0.5
120 90 0.75 0.5
140 100 0.71 0.5

In the above table APC is constant at 0.5. This establishment the fact that the consumption function is a
straight line (or that the consumption function is linear). This further tells us that as Y and C increases
the ratio of consumption to income i.e APC continuously falls. It falls from 2 to 0.71. We shall further
explain the table with the help of a diagram.
The given diagram explains with APC and MPC. It shows that APC falls at higher level of income
because with an increase in income the saving (shown by the gap between CC line and 45 line) keep on
increasing.