CH#10

Propensity to consume:
Consumption function
In macro economics aggregate
consumption is the part of the
aggregate income which is spent on
consumer goods e.g wheat, rice, cloth
etc by the people living in a country in
one year.
• Consumption is a function of income as both
are positively correlated with each other.
Mathematically we can write
C = f (Y).
Consumption function or propensity
to consume can be defined as a curve
which shows various levels of consumptions
at various levels of income. diagram: income
along x-axis and consumption along y- axis)
• Average propensity to consume (APC):
the ratio of aggregate consumption to
aggregate income is known as to average
propensity to consume.
APC = C / Y or C : Y
Example: supposing that income level of Afs
100 billion, out of this consumption is Afs
80 billion ,then APC = 80 / 100 = 0.8
 MPC is the ratio of change in consumption
to change in income.
MPC = change in consumption /change in
income
Income (Y) Consumption (C ) APC = C / Y MPC
20 40 2.0000
40 50 1.2500 0.5
60 60 1.0000 0.5
80 70 0.8750 0.5
100 80 0.8000 0.5
120 90 0.7500 0.5
140 100 0.7143 0.5
 The Consumption Function

110
Real Consumption Spending ($

100
90
80
billions)

70
60
50
40

20 40 60 80 100 120 140

Real Disposable Income ($ billions)
• Saving is the part of national income .
• Saving is the function of income i.e.
S = f ( Y)
Saving function: level of aggregate
saving at different levels of income.
• Average propensity to Save (APS): the
ratio of savings to income
APS = S / Y
• Marginal propensity to Save: the ratio of
change in saving to change in income.
MPC = change in saving/ change in income

Note : MPC + MPS = 1

Income ( Y) Consumption (C) Saving ( S) APS= S/Y MPS
20 40 -20 -1.00 -
40 50 -10 -0.25 0.5
60 60 0 0.0 0.5
80 70 10 0.125 0.5
100 80 20 0.2 0.5
120 90 30 0.25 0.5
140 100 40 0.286 0.5