Concept of APC and MPC
The consumption function has two technical attributes or properties. They are APC and MPC.
Average Propensity to Consume (APC)
The average propensity to consume is the outcome of aggregate consumption expenditure divided by aggregate income. 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. The inverse of the average propensity to consume is the average propensity to save (APS).
Mathematically,
APC= C/Y
where,
APC= Average propensity to consume
C=aggregate consumption expenditure
Y= aggregate income.
Marginal Propensity to Consume (MPC)
The marginal propensity to consume is the ratio of the change in aggregate consumption expenditure with the change In aggregate income. The marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical “y” axis and change in income on the horizontal “x” axis.
Mathematically,
MPC = ∆C/∆Y
where,
MPC= Marginal Propensity to Consume,
∆C= change in aggregate consumption expenditure,
∆Y = change in aggregate income.
Properties of MPC
The value of MPC is always positive and less than unity.
The short-run MPC is stable. It is because the psychological and institutional factors on which the propensity to consume depends do not change in a short period.
The MPC of the poor id greater than that of the rich.
Relationship between APC and MPC
1. APC is the ratio of absolute consumption to absolute income at a particular point in time. MPC is also termed as the ratio of the change in consumption with the change in income. MPC reflects the rate of change in APC.
2. If consumption function is linear with positive consumption expenditure at zero income level, (a) APC is falling, while MPC is constant (b) APC is always greater than MPC.
3. If consumption function is linear passes through the origin, APC and MPC are equal and constant.
4. If consumption function is non-linear or curve linear (a) both APC and MPC decline with an increase in income but the decline MPC is more than the decline APC; (b) both APC and MPC increase with a decrease in income, but APC rises at a slower rate than MPC.
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