Marginal and average propensities.

1. Quuen'sCollegeBusinessStudies2012
Marginal Propensity to
Consume
C = a + b (Y –T)
The ‘b’ represents the proportion of
income consumed or the marginal
propensity to consume. Proportion
means it is the change in consumption
with respect to the change in income.
The function assumes that the mpc is
fixed.
MPC
C
Y

2. Quuen'sCollegeBusinessStudies2012
Marginal Propensity to Save
S = a + (1-b) (Y –T)
The M.P.S. denoted ‘s’ is the
proportion of income that is saved.
Proportion means it is the change
in saving with respect to the
change in income. The function
below also assumes that it is fixed
MPS
S
Y

3. Quuen'sCollegeBusinessStudies2012
RELATIONSHIPS
If M.P.C
increases,
M.P.S
decreases
If income
increases,
M.P.C and
M.P.S
remain
constant
Y = C + S
1 = M.P.C +
M.P.S
C S

4. Quuen'sCollegeBusinessStudies2012
Average Propensity to
Consume
This is the portion not
proportion of total disposable
income that is consumed
Key Point:
As income increases the
A.P.C will decrease.
APC
C
Y

5. Quuen'sCollegeBusinessStudies2012
Average Propensity to Save
This is the portion not
proportion of total disposable
income that is saved.
Key Point:
As income increases the
A.P.S will increase.
APC
S
Y

6. Quuen'sCollegeBusinessStudies2012
Calculating Propensities
Income Taxes Disp.
Income
C S APC APS MPC MPS
500 100 400 400 0 1 0 0.8 0.2
700 100 600 560 40 0.93 0,07 0.8 0.2
900 100 800 720 80 0.90 0.10 0.8 0.2
1100 100 1000 880 120 .088 0.12 0.8 0.2
1300 100 1200 1040 160 .087 0.13 0.8 0.2
Use the formulas provided to calculate the following
propensities.