Talk:Marginal propensity to consume/sandbox

MARGINAL PROPENSITY TO CONSUME (MPC): The proportion of the disposable income which individuals desire to spend on consumption is known as propensity to consume. Marginal propensity to consume (mpc) is the proportion of additional income that an individual desires to consume .The marginal propensity to consume is normally less than one. The size of the marginal propensity to consume may be affected by factors such as the consumer’s total assets, liquidity and expectations of inflation. Marginal propensity to consume can be found by dividing change in consumption by a change in income, or MPC=∆C/∆Y. The MPC can be explained with the simple example: Here ∆C= 50; ∆Y= 60 Therefore, MPC=∆C/∆Y= 50/60= 0.83 or 83%. In the below diagram, while income of the consumer increases by 60 rupees, consumption of the consumer increases by 50 rupees, giving the MPC as 83%.

Significance of MPC:
The MPC is the rate of change in the APC. When income increases, the MPC falls but more than the APC. Contrariwise, when income falls, the MPC rises and the APC also rises but at a slower rate than the former. Such changes are only possible during cyclical fluctuations whereas in the short-run there is no change in the MPC and MPC<APC. Keynes is concerned primarily with the MPC, for his analysis pertains to the short-run while the APC is useful in the long-run analysis. The post-Keynesian economists have come to the conclusion that over the long-run APC and MPC are equal and approximate 0.9. In the Keynesian analysis the MPC is given more prominence. Its value is assumed to be positive and less than unity which means that when income increases the whole of it is not spent on consumption. On the contrary, when income falls, consumption expenditure does not decline in the same proportion and never becomes zero. The Keynesian hypothesis is that the marginal propensity to consume is positive but less than unity (0<=∆C/∆Y <1) is of great analytical and practical significance. Besides telling us that consumption is an increasing function of income and it increases by less than the increment of income, this hypothesis helps in explaining 1)	The theoretical possibility of general overproduction or ‘underemployment equilibrium’ and also 2)	The relative stability of a highly developed industrial economy. For it imply that the gap between income and consumption at all high levels of income is too wide to be easily filled by investment with the possible consequences that the economy may fluctuate around underemployment equilibrium. Thus the economic significance of the MPC lies in filling the gap between income and consumption through planned investment to maintain the desired level of income.

MPC and the Multiplier:
MPC’s importance lies in the multiplier theory. The value of the multiplier is determined by MPC The higher the MPC, the higher the multiplier and vice-versa. The relationship between the multiplier and the propensity to consume is as follows--- Y= C+I ∆Y=∆C+∆I ∆Y=c ∆Y+ ∆I               (where c is MPC) ∆Y- c ∆Y= ∆I ∆Y (1 -c) = ∆I ∆Y= ∆I/(1-c) ∆Y/∆I= 1/(1-c) K= 1/(1-c)                   (where k is multiplier and k= ∆Y/∆I )

MPC and nature of country:
The MPC is higher in the case of poor than in case of rich people. The greater is any man’s income, the more of his basic human needs will have already been met, and the greater will be the tendency for him to save in order to provide for future. The marginal propensity to save of the richer classes shall be greater than that of the poorer classes. If, at any time, it is desired to increase aggregate consumption, then the purchasing power should be transferred from the richer classes (with low propensity to consume) to the poorer classes (with a higher propensity to consume). Likewise, if it is desired to reduce community consumption, the purchasing power must be taken away from the poorer classes by taxing consumption. The marginal propensity to consume is higher in a poor country and lower in the case of rich country. The reason is same as stated above. In the case of rich country, most of the basic wants of the people have already been satisfied, and all the additional increments of income are saved, resulting in a higher marginal propensity to save but in a lower marginal propensity to consume. In a poor country, on the other hand, most of the basic wants of the people remain unsatisfied so that additional increments of income go to increase consumption, resulting in a higher marginal propensity to consume but in a lower marginal propensity to save.it is on account of this that the MPC is higher in the backward and underdeveloped countries of Asia and Africa,a nd lower in the advanced and developed countries like the USA, the UK, West Germany etc.