Aggregate Expenditure Model
MPC, MPS, APC and APS
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Marginal Propensity to Consume and Marginal Propensity to Save
The MPC makes up the gradient of the consumption line and the MPS makes up the gradient of the savings line in the consumption function.
Marginal Propensity to Consume
The Marginal Propensity to Consume (MPC) measures the increase in household consumption from an increase in household income. To calculate MPC: MPC = (Change in Consumption)/(Change in Disposable Income)
Can you calculate the MPC from the model below?
Answer: Change in Consumption (Consumer Spending): = 600-500 = 100 Change in Disposable Income: = 900-500 = 400 MPC: = 100/400 = 0.25
Average Propensity to Consume (APC)
Average Propensity to Consume measures the proportion of income spent on consumption.
APC = Total Consumption/Total Disposable Income
Can you find what the APC is from figure 1?
Answer: Total Consumption = 600 Total Disposable Income = 900 APC = 600/900 = 0.67 Note: As income increases, the APC decreases.
Marginal Propensity to Save
Marginal Propensity to Save (MPS) measures the increase in savings from a given increase in household income.
MPS = (Change in Savings)/(Change in Disposable Income) OR MPS = 1 - MPC
Can you find what the MPS is from figure 2?
Answer:
Method 1
Find MPC Change in Consumption = 625-500 = 125
Change in Disposable Income = 1000-500 = 500 MPC = 125/500 = 0.25
MPS = 1 -0.25 = 0.75
Method 2
Find MPS Change in Savings = 375 - 0
(Note: the savings level at a disposable income of 500 is 0) = 375
Change in Disposable Income = 1000-500 = 500 MPS = 375/500 = 0.75
Average Propensity to Save (APS)
Average Propensity to Save (APS) measures the total proportion of income that is saved.
APS = Total Savings/ Total Income
Can you find the APS of figure 2?
Answer:
Total Savings = 375
Total Income = 1000
APS = 375/1000 = 0.375
Note: As income increases, the APS increases.