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:
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:
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:
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:
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
1 = APC + 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
Now dividing both sides by
1 = MPC + 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) (₹)
APC
(₹)APS
MPC
(₹)MPS
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 |
APC can never be less than zero, because of the presence of |
APS can be less than zero when C>Y; i.e., before Break-even Point. |
MPC can never be less than zero, as |
MPS can never be less than zero, as |
|
Zero |
APC can never be zero, because of the presence of |
APS can be zero when C=Y; i.e., at Break-even Point. |
MPC can never be zero, when |
MPS can never be zero, when |
|
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 |
MPS can never be zero, when |
|
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 |
MPS can never be less than zero, as |
Where,
C = Consumption
Y = National Income