TYPES OF PROPENSITIES TO SAVE

Average Propensity to Save (APS)

Marginal Propensity to Save (MPS)

Average propensity to save (APS) :
Definition: The ratio of aggregate saving to aggregate income is known as average propensity to save (APS).

By dividing aggregate saving by aggregate income, we get APS.

APS = Saving (S) / Income (Y)

APS Schedule & Curve:

Important Points for APS:

APS can never be 1 or more than one. As saving, can never be equal to or more than national income.

APS can be 0: APS is 0 when income is equal to consumption i.e., saving = 0. This point is known as break-even point.

APS can be negative or less than 1. At income levels which are lower than the break-even point APS can be negative as there will be dis-savings in the economy.

APS rises with increase in income. APS rises with the increase in income because the proportion of income saved keeps on increasing.

Marginal Propensity to Save:

Definition: The ratio of change in saving (ΔS) to change in income (ΔY) is called MPS.

 It is proportion of income saved out of additional (incremental) income.

MPC = Change in Saving / Change in Income

MPC Schedule & Curve:

 

Important points for MPS:

Since MPS measures the slope of saving curve, constant value of MPS means that the saving curve is a straight line.

MPS varies between 0 and 1.If the entire additional income is saved then MPS = 1.

However, if the entire additional income is consumed, MPS = 0.

Comparison between APS & MPS.

Relationship between APC & APS

Y = C+S

Dividing both sided by Y,

Y/Y = C/Y + S/Y

: 1 = APC + APS

Relationship between MPC & MPS

Change in Y = Change in C + Change in S

Dividing both side by Change in Y,

Change in Y/Change in Y = Change in C/Change in Y + Change is S/Change in Y

: 1 = MPC + MPS