Marginal propensity to consume

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In economics, the marginal propensity to consume (MPC) is a measurement that can put induced consumption into numbers. Induced consumption is the idea that an increase in personal consumer spending (consumption) happens with an increase in disposable income (income after taxes and transfers). The proportion of disposable income which people spend on consumption is called the propensity to consume. MPC is the proportion of more income that a person spends. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then the household will spend 65 cents and save 35 cents of that dollar. Obviously, the household cannot spend more than the extra dollar (without borrowing).

John Maynard Keynes says that the marginal propensity to consume is less than one.[1]

The MPC is higher for poorer people than in rich.[2]

Background[change | change source]

Mathematically, the function is written as the derivative of the consumption function with respect to disposable income , i.e., the instantaneous slope of the - curve.

or, approximately,

, where is the change in consumption, and is the change in disposable income that created the consumption.

Marginal propensity to consume can be found by dividing change in consumption by a change in income, or . The MPC can be explained with the simple example:

Income Consumption
120 120
180 170

Here ; Therefore, or 83%. For example, suppose you receive a bonus with your paycheck, and it's $500 on top of your normal annual earnings. You now have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on something, your marginal propensity to consume will be 0.8 ().

Related pages[change | change source]

References[change | change source]

  1. Keynes, John M. (1936). The General Theory of Employment, Interest and Money. New York: Harcourt Brace Jovanovich. p. 96. The fundamental psychological law ... is that men [and women] are disposed, as a rule and on average, to increase their consumption as their income increases, but not as much as the increase in their income.
  2. http://equitablegrowth.org/equitablog/wealth-inequality-marginal-propensity-consume/

More reading[change | change source]