Posted by Anjali Kaur on Sep 28, 2020

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

BasisAPSMPS
MeaningAPS is the ratio of savings to the income levelMPS is the ratio of change in savings to the change in the income level
FormulaAPS = S/YMPS = Change in S/ Change in Y

Relationship between APS and APC

APC + APS = 1

Because,

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

Because,

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:

Aggregate Demand

Introduction To Money

Central bank and its function

Process of credit creation

Precautions while calculating the national income

Real and nominal GDP

National income

National income formula list

Value-added method

Income method

Expenditure method

GDP and welfare

Domestic territory and national residents

Circular flow of income

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