MPC Full Form

In economics, the proportion of total income or an increase in income that consumers prefer to spend on goods and services rather than savings is known as MPC. The average propensity to spend is the ratio of overall consumption to total income; the marginal propensity to consume is the increase in consumption produced by an increase in income divided by that increase in income. The sum of the tendency to spend and the propensity to save will always equal one since families split their incomes between consumption and saving.

What is MPC?

The marginal propensity to consume (MPC) is defined in economics as the proportion of an aggregate increase in income that a consumer spends on goods and services rather than conserving them. The marginal propensity to spend is determined as the change in consumption divided by the change in income in Keynesian macroeconomic theory.

 A consumption line, which is a sloping line generated by charting the change in consumption on the vertical “y” axis and the change in income on the horizontal “x” axis, is used to represent MPC.

Understanding Marginal Consumption Propensity (MPC)

ΔC / ΔY, where ΔC is the change in consumption and ΔY is the change in income, is the marginal propensity to consume. MPC equals 0.8 / 1 = 0.8 if consumption rises by 80 cents for every extra dollar of income.

Let’s say you get a Rs. 500 bonus on top of your regular annual salary. You suddenly have Rs. 500 more in your bank account than you had previously. Your marginal propensity to consume will be 0.8 (Rs. 400 divided by Rs. 500) if you opt to spend Rs. 400 of this marginal gain in income on a new suit and save the remaining Rs. 100. 

The marginal propensity to save is the flip side of the marginal propensity to spend, and it reveals how much a change in income influences saving levels. The marginal inclination to spend plus the marginal tendency to save equals one. Your marginal propensity to save in the suit example is 0.2 (Rs. 100 divided by Rs. 500). Your marginal propensity to spend will be 0 (Rs.0 divided by 500), and your marginal propensity to save will be 1 (Rs. 500 divided by 500) if you elect to save the whole Rs. 500.

MPC and Economic Policy

Economists can compute households’ MPC by income level using data on household income and consumption. This computation is critical since MPC is not constant and fluctuates according to income level. The lower the MPC, the greater the income, since when a person’s income rises, more of their desires and needs are met; as a consequence, they save more. MPC is substantially greater at low-income levels since most or all of a person’s income must be allocated to subsistence consumption.

According to Keynesian theory, a rise in government expenditure or investment raises consumer income, causing them to spend more. We can calculate how much an increase in output will affect spending if we know what their marginal propensity to consume is. Through a mechanism known as the Keynesian multiplier, this new spending will produce further production, establishing a continuous cycle. The bigger the impact, the greater the share of the excess money that is spent rather than saved. If economists can estimate the MPC, they may use it to predict the overall impact of a potential rise in earnings. The higher the MPC, the larger the multiplier—the bigger the increase in consumption from the increase in investment.

What is the Marginal Propensity to consume in simple terms? 

The marginal propensity to consume is a measure of how much a consumer would spend or save in response to a wage increase. To put it another way, what percentage of a person’s new income will they spend if they earn a raise? Higher wages frequently show a reduced marginal propensity to consume because consumption demands are met, allowing for more savings. Lower-income people, on the other hand, have a higher marginal propensity to spend since a larger portion of their income may be spent on daily living expenditures.

Calculation of Marginal Propensity to Consume

The marginal propensity to spend is calculated by dividing the change in consumption by the change in income. For example, if a person’s spending grows by 90% for every additional dollar of wages, the equation is 0.9/1 = 0.9. Consider the case of someone who receives a Rs. 1,000 bonus and spends Rs. 100 of it while saving Rs. 900. Rs. 100/Rs. 1,000, or 0.1, would be the marginal propensity to consume.

Economic Importance of the Marginal Propensity to Consume

The marginal willingness to consume is an important variable in demonstrating the multiplier impact of economic stimulus expenditure in Keynesian macroeconomic theory. It indicates that increasing government expenditure will raise consumer income, which will lead to increased consumer spending. This rise in investment will result in a greater aggregate level of demand on a macro level.

Conclusion

The MPC, or Marginal Propensity to Consume, is a key component of Keynesian macroeconomic theory. This hypothesis proposes that when an individual’s wealth rises, he or she will be more likely to spend more. In other words, Marginal Propensity to Consume (MPC) evaluates the proportionate increase in consumption with increasing income or the amount of extra salary spent on consumption rather than saving. The MPC, or Marginal Propensity to Consume, is influenced by one’s income level. It may fluctuate depending on income levels, with the MPC being lower at higher income levels.