59. What is meant by marginal propensity to consume?

What is meant by marginal propensity to consume?

Marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). What does this mean?

At low levels of Income the spending in an economy will be more than the total income (or production) firms will be experiencing shortages (more demand than what they are producing) There will be a pressure on them to increase production. At Very high levels of income firms will be experiencing a glut (or over production) and will contract their activities). There will be an equilibrium point where the MPC (Marginal Propensity to Consume line intersects the 45 - degree line). You can read more about this in you textbook (Mohr and Associates on p325 -in the new edition - the Chapter on the Simple Keynesian model)


Here is an example of how to calculate the MPC given a change in Income (Y) and a change in Consumption (C) using the formula below (Change in consumption C divided by the change in income Y).

Income	Consumption
120	120
180	170

Here ;  Therefore,  or 83%. For example, suppose you receive a bonus with your paycheck, and it's $500 on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit, your marginal propensity to consume will be 0.8 (). (Wikipedia example)