TYPES OF PROPENSITIES TO CONSUME
Average Propensity of Consume
Marginal Propensity to Consume
Average propensity to consume (APC):
Definition: The ratio of aggregate consumption expenditure to aggregate income is known, as average propensity to consume.
It indicates the percentage (or ratio) of income which is being spent on consumption.
APC = Consumption (C) / Income (Y)
It can be explained with the help of following schedule and diagram:
Important Points for APC:
When APC is more than 1: When APC is more than 1, consumption is more than national income, i.e. before the break-even point.
APC = 1: When APC is equal to 1, consumption is equal to national income, which is known as to be break-even point.
When APC is less than 1: When consumption is less than national income, i.e. beyond the break-even point.
Marginal Propensity to consume (MPC):
Definition: The ratio of change in consumption (C) to change in income (Y) is known as marginal propensity to consume.
It indicates the proportion of additional income that is being spent on consumption.
MPC = Change in Consumption / Change in Income
It can be explained with the help of following schedule and diagram:
Important points for MPC:
Value of MPC varies between 0 and 1: As we know that increase in income is either spent on consumption or saved for future use.
MPC falls with the successive increase in income: It happens because as an economy becomes richer, it has the tendency to consume smaller percentage of each increment to its income.
DIFFERENCE BETWEEN APC & MPC