Marginal Propensity To Consume
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: 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 a key concept in Keynesian macroeconomic theory, calculated as the change in consumption divided by the change in income.
Origin: The concept of MPC was introduced by British economist John Maynard Keynes in the 1930s. Keynes elaborated on this concept in his seminal work, 'The General Theory of Employment, Interest, and Money,' highlighting the importance of consumption in economic activity.
Categories and Characteristics: MPC can be categorized into high MPC and low MPC. High MPC indicates that consumers spend a larger portion of their additional income on consumption, while low MPC suggests a tendency to save more. High MPC is typically observed in low-income groups whose basic needs are not fully met, whereas low MPC is common among high-income groups with relatively lower consumption needs.
Specific Cases:
- Suppose a household's monthly income increases by $1000, of which $800 is spent on consumption and $200 is saved. In this case, the MPC is 800/1000=0.8. This means that for every additional dollar of income, the household spends 80 cents on consumption.
- Another example is a country implementing an economic stimulus plan by distributing subsidies to residents. If most residents use the subsidies to purchase daily necessities and services rather than saving, it indicates a high MPC, suggesting that the stimulus policy effectively boosts consumption and economic growth.
Common Questions:
- Why is MPC important for economic policy? Because MPC helps governments predict the impact of economic policies. If MPC is high, policies that increase household income will significantly boost consumption, thereby stimulating economic growth.
- Does MPC change over time? Yes, MPC can change with economic conditions, income levels, and consumer confidence.
