The standard method for calculating the marginal propensity to consume, or MPC, is to divide marginal consumption by marginal income. For example, we may use the following equation to compute MPC:
MPC = Changes in change in consumption / Change in income.
In which:
Change in consumption: The percentage change in consumption (of an item, a service, or overall consumption in an economy) as a consequence of income fluctuations.
Change in income: This phrase means a percentage change considering 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 households’ MPC by income level using income and consumption of a household data. This computation is critical since this vaule is not constant and fluctuates depending on the income level. The lower the MPC, the greater the income – when somebody’s income rises, more of their needs are met; as a consequence, more is saved. Conversely, MPC is substantially greater at lower income levels. Most (or all) of a person’s income is allocated to subsistence consumption.
Origins, founder and history of Marginal Propensity to Consume
The idea comes from John Maynard Keynes‘ book “The General Theory of Employment and Interest” (1883-1946). The marginal propensity to spend, as defined by Keynes, is the change in consumption which associates with a change in one’s 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.
If the marginal propensity to consume from income is nine-tenths, a one-dollar increase in autonomous spending will result in a ninety-cent increase in consumer spending and income; this ninety-cent increase in income will result in another eighty-one cent increase in consumer spending as well as income. The final product of the one-dollar injection of spending and the inverse of one minus the marginal propensity to consume from income will be 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 (https://calconcalculator.com/finance/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.
