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