By admin - June, 14th 2022

The standard method for calculating the marginal propensity to consume, or MPC –  marginal consumption has to be divided by marginal income. For example, we may use the following equation to compute MPC:

MPC = Changes in change in consumption / Change in income.

Where:

Change in consumption: The percentage change in consumption (of an item, a service, or overall economy) as a consequence of income fluctuations.

Change in income: This phrase refers to the percentage change in consumer income levels.

What is the marginal propensity to consume?

So we can define in economics the marginal propensity to consume or MPC, as the proportion of an aggregate increase in income that a consumer spends on goods and services rather than conserving it. The marginal propensity to spend is determined as the change in consumption divided by the change in income in Keynesian macroeconomic theory. So MPC is represented by a consumption line, which is a sloping line formed by graphing changes in consumption on the vertical “y” axis and changes in income on the horizontal “x” axis.

Economists can compute a households’ MPC by its income level using household income and consumption data. This is critical since MPC is not constant – it fluctuates according to income level. The lower the MPC, the greater the income (when a person’s income in higher, more of their desires and needs are met; as a consequence, they save more). Conversely, MPC is significantly greater at low income levels – since most of a person’s income must be allocated to subsistence consumption.

Origins, founder and history of Marginal Propensity to Consume?

The idea comes from John M. Keynes‘ book “The General Theory of Employment and Interest” (1883-1946). The marginal propensity to spend, as defined by Keynes, is a change in consumption connected with a change in income; subsequent use has distinguished several of these propensities. The expenditure multiplier, or the amount that total production will grow from an increase in autonomous spending is determined in basic Keynesian aggregate economy models by the marginal propensity to consume from income.

When marginal propensity to consume from income equals nine-tenths – a one-dollar increase in spending (autonomous) will result in a ninety-cent increase in consumer spending and income. Said increase in income will result in another eighty-one cent increase in consumer spending and income, and so on. The product of the one-dollar injection of spending and the inverse of one minus the marginal propensity to consume from income will equal ten dollars.

 

Marginal propensity to consume – example

For example, the Wilson family’s spending in November 2016 was $ 30,000, and in December – $ 35,000. He received revenue in November 2016, when it was equal to $ 40,000, and in December – $ 60,000. Calculate their MPC?

Savings 1 = 40,000 – from 30,000 + 10,000 = dollars.

Savings 2 = 60,000 – 35,000 + 25,000 = dollars.

MPC = Changes in change in consumption / revenue

= 35.000 -30.000 / 60.000 – 40.000

= 0.25

 

Marginal propensity to consume – mpc calculator

Our MPC calculator is a straightforward tool for calculating the marginal propensity to consume, a fraction closely related to the concepts of marginal propensity to save, the average propensity to consume, and the money multiplier. Our MPC calculator, which is based on the MPC definition and consumption function. You may calculate the MPC using the MPC calculator if you give increases in disposable income and consumer spending. You may define the consumption function, which displays below the result of the marginal propensity to consume, by defining the autonomous consumer spending.