Differentiate between the average propensity to consume and the marginal propensity to consume.
First, APC refers to the ratio of absolute consumption absolute income at a particular point of time.
On the other hand MP represents the ratio of change in consumption to change in income; MPC is the rate of change in APC.
How is APC calculated?
The average propensity to consume (APC) is the ratio of consumption expenditures (C) to disposable income (DI), or APC = C / DI. The average propensity to save (APS) is the ratio of savings (S) to disposable income, or APS = S / DI.
What is marginal propensity to save and consume?
The marginal propensity to save (MPS) is the fraction of an increase in income that is not spent on an increase in consumption. That is, the marginal propensity to save is the proportion of each additional dollar of household income that is used for saving.
What is the meaning of average propensity to consume?
The average propensity to consume (APC) refers to the percentage of income spent on goods and services rather than going to savings. A person can determine the percentage of income spent by dividing the average household consumption, or what is spent, by the average household income, or what is earned.
What is the relationship between the MPC and the MPS?
The marginal propensity to consume (MPC) is the flip side of MPS. MPC helps to quantify the relationship between income and consumption. MPC is the portion of each extra dollar of a household’s income that is consumed or spent.