Posted by Anjali Kaur on Sep 23, 2020

Propensity To Consume and Propensity To Save

The propensity to consume means willingness to consume and propensity to save means willingness to save. In this post, we will learn about these 2 concepts in detail. Let’s learn more about it.

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Consumption Function

Consumption function means the functional relationship between consumption expenditure and the level of income.

C = c + bY,

Where,

C – Consumption expenditure

c – Autonomous consumption expenditure

b – Marginal propensity to consume or the slope of the consumption curve

Y – National income

The consumption function is an upward sloping curve because consumption is dependent on income and it has an intercept which is c which is not dependent on the level of income. As shown below:

Propensity To Consume

Propensity means willingness, so propensity to consume stands for willingness to consume and it is dependent on the level of income. It is of 2 types:

  1. Average Propensity to consume
  2. Marginal Propensity to consume

1. Average Propensity To Consume (APC)

It refers to the ratio of consumption expenditure to the level of corresponding income.

APC = C/Y

2. Marginal Propensity To Consume (MPC)

It refers to the ratio of change in consumption expenditure due to the change in the level of income.

MPC = Change in C/ Change in Y

Saving Function

It refers to the functional relationship between savings and the level of income.

S = -c +sY

Where,

S – Saving function

-c – Dissaving

s – Marginal propensity to save or the slope of the saving curve

Y – National income

What is dissaving?

Dissaving means spending money more than the income because of dissaving the saving functions starts from the negative intercept. As shown below:

Saving Function - Businesstopia

Propensity To Save

It refers to the willingness to save on the basis of income. It is of 2 types:

  1. Average propensity to save
  2. Marginal propensity to save

1. Average Propensity To Save (APS)

It refers to the ratio of savings to the corresponding level of income.

APS = S/Y

2. Marginal Propensity To Save (MPS)

It refers to the ratio of change in savings to the change in the level of income.

MPS = Change in S/ Change in Y

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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