Average and Marginal Propensity To Save
Hi there. In this post, I will be writing about the important points related to the average and marginal propensity to consume. I will recommend you to read my post on the propensity to save before going through this. Let’s learn more about it.
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Average Propensity To Save (APS)
The average propensity to save refers to the ratio of savings to the level of corresponding income.
APS = S/Y
There are some important points related to APS:
1. APS can never be ≥ 1
This is because savings can never be equal to or more than national income.
APS cannot be ≥ Y
APS ≠ Y
2. APS can be 0
This happens when Y = C, that is, during break-even point
3. APS can be negative or APS < 1
This happens when the income level is lower than the break-even point because during this time, there is dissaving in the economy.
4. APS has a direct relation with the level of income
APS rises with the increase in the income level. This happens because the proportion of the income getting saved keeps on increasing with the increase in the level of income
Marginal Propensity To Save
The marginal propensity to save refers to the ratio of change in savings to the change in national income.
MPS = Change in Savings/ Change in National Income
There are some important points related to MPS:
1. MPS lies between 0 and 1
2. MPS can be 1
This happens when the entire additional income is saved, that is, change in consumption is 0, then MPS = 1
3. MPS can be 0
This happens when the entire additional income is consumed, that is, change in savings = 0, then MPS = 0
Difference between APS and MPS
|Meaning||APS is the ratio of savings to the income level||MPS is the ratio of change in savings to the change in the income level|
|Formula||APS = S/Y||MPS = Change in S/ Change in Y|
Relationship between APS and APC
APC + APS = 1
AS(Aggregate Supply) = C + S
Y = C + S (AS= Y) – 1
Dividing the above equation by Y:
Y/Y = C/Y + S/Y
1 = APC + APS, hence proved.
Relationship between MPC and MPS
MPC + MPS = 1
Y = C + S
So, Change in Y = Change in C + Change in S
Δ Y = Δ C + Δ S
Divide the above equation by Δ Y
Δ Y/ Δ Y = Δ C/ Δ Y + Δ S/ Δ Y
1 = MPC + MPS, hence proved.
Thank You for reading.
You can read the related post on macroeconomics:
Precautions while calculating the national income
Domestic territory and national residents
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