Open In App

Relationship between different propensities (APC, MPC, APS and MPS)

Improve
Improve
Like Article
Like
Save
Share
Report

The four different types of propensities are Average Propensity to Consume (APC), Marginal Propensity to Consume (MPC), Average Propensity to Save (APS), and Marginal Propensity to Save (MPS).

Average Propensity to Consume (APC)

It is the ratio of consumption expenditure to the corresponding income level. The formula to determine Average Propensity to Consume (APC) is:

Average~Propensity~to~Consume~(APC)=\frac{Consumption~(C)}{Income~(Y)}

Marginal Propensity to Consume (MPC)

It is the ratio of the change in consumption expenditure to the change in total income. In simple terms, MPC explains the proportion of change income that is spent on consumption. The formula to determine Marginal Propensity to Consume (MPC) is as follows:

Marginal~Propensity~to~Consume~(MPC)=\frac{Change~in~Consumption~(\Delta{C})}{Change~in~Income~(\Delta{Y})}

Average Propensity to Save (APS)

It is the ratio of saving to the corresponding income level. The formula to determine the Average Propensity to Save (APS) is:

Average~Propensity~to~Save~(APS)=\frac{Saving~(S)}{Income~(Y)}

Marginal Propensity to Save (MPS)

It is the ratio of the change in saving to the change in total income. The formula to determine Marginal Propensity to Save (MPS) is:

Marginal~Propensity~to~Save~(MPS)=\frac{Change~in~Saving~(\Delta{S})}{Change~in~Income~(\Delta{Y})}

Relationship between APC and APS

The sum of the Average Propensity to Consume (APC) and Average Propensity to Save (APS) is equal to one. 

Proof:

We already know that Y = C + S.

Now dividing both sides by Y, we get

\frac{Y}{Y}=\frac{C}{Y}+\frac{S}{Y}

1 = APC + APS [\because\frac{Y}{Y}=1,~\frac{C}{Y}=APC,~and~\frac{S}{Y}=APS]

Also, APC + APS = 1 because the income is either used for consumption or for saving.

Relationship between MPC and MPS

The sum of the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is equal to one.

Proof:

We already know that \Delta{Y}=\Delta{C}+\Delta{S}

Now dividing both sides by \Delta{Y}  , we get

\frac{\Delta{Y}}{\Delta{Y}}=\frac{\Delta{C}}{\Delta{Y}}+\frac{\Delta{S}}{\Delta{Y}}

1 = MPC + MPS \because\frac{\Delta{Y}}{\Delta{Y}}=1,~\frac{\Delta{C}}{\Delta{Y}}=MPC,~and~\frac{\Delta{S}}{\Delta{Y}}=MPS

Also, MPC + MPS = 1 because total increment in income is either used for consumption or for saving.

Example:

The inter-relationships between APC, MPC, APS, and MPS can be understood with the help of the following schedule.

Inome
(Y) (₹)

Consumption
(C) (₹)

Saving
(S) (₹)

\Delta{C}

\Delta{S}

APC
(₹) (\frac{C}{Y})

APS
(\frac{S}{Y})

MPC
(₹) (\frac{\Delta{C}}{\Delta{Y}})

MPS
(\frac{\Delta{S}}{\Delta{Y}})

0

100

-100

100

150

-50

50

50

1.5

0.5

0.5

0.5

200

200

0

50

50

1

0

0.5

0.5

300

250

50

50

50

0.83

0.17

0.5

0.5

400

300

100

50

50

0.75

0.25

0.5

0.5

500

350

150

50

50

0.7

0.3

0.5

0.5

Values of APC, APS, MPC, and MPS

The value of MPC and MPS lies between 0 and 1. Whereas, the value of APC can be more than 1 and APS can be less than 1.

Value

APC

APS

MPC

MPS

Negative
(less than zero)

APC can never be less than zero, because of the presence of \bar{c}

APS can be less than zero when C>Y; i.e., before Break-even Point.

MPC can never be less than zero, as \Delta{S}     can never be more than \Delta{Y}

MPS can never be less than zero, as \Delta{C}     can never be more than \Delta{Y}

Zero

APC can never be zero, because of the presence of \bar{c}

APS can be zero when C=Y; i.e., at Break-even Point.

MPC can never be zero, when \Delta{S}=\Delta{Y}     

MPS can never be zero, when \Delta{C}=\Delta{Y}     

One

APC can be one when C=Y; i.e., at BEP

APS can never by one as savings can never be equal to income

MPC can never be zero, when \Delta{C}=\Delta{Y}     

MPS can never be zero, when \Delta{S}=\Delta{Y}     

More than One

APC can be more than one when C>Y; i.e., before Break-even Point.

APS can never be more than one as savings can never be more than income

MPC can never be less than zero, as \Delta{C}     can never be more than \Delta{Y}

MPS can never be less than zero, as \Delta{S}     can never be more than \Delta{Y}

Where,

\bar{c}   = Autonomous Consumption

C = Consumption

Y = National Income

\Delta{S}   = Change in Savings

\Delta{C}   = Change in Consumption

\Delta{Y}   = Change in National Income



Last Updated : 06 Apr, 2023
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads