Posted by Anjali Kaur on Sep 24, 2020

The Average and Marginal Propensity to Consume

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 Propensity to Consume before going through this.

Let’s learn more about it.

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What is Break-Even Point?

The Break-even point means when consumption expenditure becomes equal to the national income.

Break-even point; C = Y

NCERT Solutions for Class 12 Macro Economics Aggregate Demand and Its  Related Concepts - Learn CBSE

It means, whatever is earned, is spent and nothing is saved. For example, if an economy’s national income is $100 and the full amount is spent by the people of the economy on consumption, this implies that the economy has reached its break-even point and there are NO SAVINGS in the economy.

Average Propensity To Consume (APC)

The average propensity to consume refers to the ratio of consumption expenditure to the level of corresponding income.

APC = C/Y

There are some important points related to APC:

1. APC > 1

Whenever APC > 1, it means Consumption expenditure is more than national income. So, the economy is said to be before the break-even point.

WHY?

APC = C/Y

When I say APC> 1,

C/Y > 1

C > Y. Look at C > Y:

NCERT Solutions for Class 12 Macro Economics Aggregate Demand and Its  Related Concepts - Learn CBSE

So, Consumption expenditure is more than the national income of the country and the country is before the break-even point (C=Y)

Note: Students get a lot of questions on this point. Like, Can APC be greater 1? True or false.

Your answer is True and you can use the above explanation for that.

2. APC = 1 ( Break-even point)

Whenever APC = 1, then consumption expenditure is equal to the national income, that is, C = Y, and that economy is said to be at the break-even point.

3. APC < 1

Whenever APC < 1, then consumption expenditure is less than Y, that is, the economy is beyond or has crossed the break-even point. Look at Y> C:

NCERT Solutions for Class 12 Macro Economics Aggregate Demand and Its  Related Concepts - Learn CBSE

4. APC can never be 0

APC can never be 0 because, at 0 levels of income, we have autonomous consumption which is independent of the level of income.

APC can be greater than 1, or less than 1 or equal to 1. But it can never be 0, due to autonomous consumption expenditure.

Marginal Propensity To Consume

The marginal propensity to consume 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

There are some important points related to MPC:

1. MPC varies between 0 and 1

Marginal Propensity to Consume (MPC), is a ratio between the change in consumption to change in income. This is the reason it lies between the range 0-1.

2. MPC can be 1

If the entire additional income ( Change in income) is used in consumption, than MPC will be 1.

3. MPC can be 0

If the entire additional income (Change in income) is saved, and nothing is spent. Then MPC will be 0.

4. MPC of poor people is more than the MPC of rich people

It happens because poor people spend a greater percentage of their increased income on consumption as their basic needs remain unsatisfied. On the other hand, rich people spend a smaller percentage as they already have higher standard of living. This the reason, that the MPC of developing countries like India or Bangladesh is more than the MPC of developed countries like America and England.

Thank You for reading!

You can read the related post on macroeconomics:

Propensity to Consume and Propensity to Save

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

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