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 means the functional relationship between consumption expenditure and the level of income.
C = c + bY,
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:
- Average Propensity to consume
- 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
It refers to the functional relationship between savings and the level of income.
S = -c +sY
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:
Propensity To Save
It refers to the willingness to save on the basis of income. It is of 2 types:
- Average propensity to save
- 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:
Precautions while calculating the national income
Domestic territory and national residents
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