The contents show practical example of APC,MPC,APS and MPS

1. Navratan sharma PG Com.SMPS
Practice with APC, APS, MPC and MPS
Average Propensities PartA
The average propensityto consume (APC) is the ratio of consumptionexpenditures(C) to Y income
(Y),or APC = C / Y
The average propensityto save (APS) isthe ratio of savings (S) to disposable income,orAPS = S / Y
1. Usingthe data inFigure 20.1, calculate the APC and APS at each level ofdisposable income
given.
Figure 20.1
Average PropensitiestoConsume and to Save
Disposable Income ConsumptionSaving APC and APS
Y C S (APC)C/Y (APS)S/Y
00 2000 -2000 00 -
2000 3600 -1600 1.80 .80
4000 5200 -1200 1.30 .30
6000 6800 -800 1.13 .13
8000 8400 -400 1.05 .05
10000 10000 00 1.00 0
12000 11600 +400 .97 .03
Saving is negative some timeswhenexpendituresare more than income due to extra
expensesorwe may have borrow for fulfillingneedorsurvival .
MPC Part B
Marginal Propensities
The marginal propensity to consume (MPC) is the change in consumption divided by the
change in income. It is a fraction of any change in DI that is spent on consumer goods: MPC =
∆C / ∆Y
The marginal propensity to save (MPS) is the fraction saved of any change in disposable
income. The MPS is equal to the change in saving divided by the change in DI: MPS = ∆S / ∆Y
2. Using the data in Figure 20.2, calculate the MPC and MPS at each level of disposable income.
The first calculation is completed as an example. (This is not a typical consumption function.
Its purpose is to provide practice in calculating MPC and MPS.)
Marginal Propensities to Consume and to Save
Y C S MPC ∆C/∆Y MPS(1-MPC)
12000 12100 -100 -
13000 13000 00 .90 .10
14000 13800 200 .80 .20

2. 15000 14500 500 .70 .30
16000 15100 900 .60 .40
17000 15600 1400 .50 .50
MPC∆C/∆Y 13000-12100
13000-12000
900/1000=.90 and so on
MPS is the saving out of total income.
Why must the sum of the MPC and MPS always equal 1?
Ans: We know that consumption plus saving is equal to income .
Part C
Changes in APC and MPC as Y increases
Y C S APC C/Y APS(1-.20) MPC∆C/∆Y MPS
10000 12000 -12000 1.20 -.20 - -
20000 21000 -1000 1.05 -.05 .90 .10
30000 30000 00 1.0 00 .90 .10
40000 39000 1000 .975 .25 .90 .10
50000 48000 2000 .96 .04 .90 .10
60000 57000 3000 .95 .05 .90 .10
70000 66000 4000 .94 .06 .90 .10