Marginal Propensity To Consume
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In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical "y" axis and the change in income on the horizontal "x" axis.
Definition
In economics, the Marginal Propensity to Consume (MPC) refers to the proportion of additional income that a consumer spends on goods and services rather than saving. It is calculated by dividing the change in consumption by the change in income. MPC is a key concept in Keynesian macroeconomic theory, used to analyze the impact of consumer behavior on the economy.
Origin
The concept of Marginal Propensity to Consume originated in the 1930s, introduced by economist John Maynard Keynes in his work 'The General Theory of Employment, Interest, and Money'. Keynes emphasized the central role of consumption in economic activity, making MPC an important tool for analyzing economic fluctuations and policy-making.
Categories and Features
MPC can be categorized based on different income levels and economic environments. Typically, lower-income groups have a higher MPC because they tend to spend most of their additional income, while higher-income groups have a lower MPC as they are more likely to save extra income. Features of MPC include its impact on economic stimulus policies, such as government efforts to boost aggregate demand through increased public spending or tax cuts.
Case Studies
Following the 2008 financial crisis, the U.S. government implemented an economic stimulus package that included cash subsidies to households. Studies found that lower-income households had a higher MPC, spending most of the subsidies and thus aiding economic recovery. Another example is China's issuance of consumption vouchers during the 2020 pandemic, aimed at boosting consumer spending, which effectively stimulated short-term consumption growth.
Common Issues
Common issues investors face when applying the concept of MPC include confusing it with the Average Propensity to Consume (APC). MPC focuses on the proportion of additional income spent, while APC is the proportion of total income spent. Additionally, MPC is not constant and can fluctuate with changes in economic conditions and policies.
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