Marginal Propensity to Consume
Marginal propensity to consume in economics refers to a metric that is used in quantifying induced consumption. It is a concept that suggests that there is an increased individual consumer spending or consumption as a result of increased disposable income or income after transfers and taxes. Propensity to consume refers to the disposable income proportion that individual consumers spend on induced consumption.
In some cases, MPC is defined as the additional dollar’s proportion of the household income that goes into consumption expenditure. MPC is another phrase that is used in reference to the consumption line’s slope and to calculate it, variation in consumption is divided by variation in income.
In the Keynesian economies, MPC plays a major role because it quantifies the relation of consumption with income and fundamental law of psychology. MPC also forms the foundation of the slope in the line of aggregate expenditures while playing a critical role in multiplier process.
Basically, MPC indicates how household sector spends extra income. It symbolizes the amount of the additional income that is used by households on consumption expenditure. For instance, if MPC is indicated as 0.75 it means that 75 percent of the extra income earned by a household went to consumption expenditure. MPC plays a critical role in macro economy.
It captures the induced consumption as well as fundamental law of psychology of the consumer spending as proposed by Maynard Keynes which indicates the major difference between the classical economics and Keynesian theory. Additionally, as the foundation of slope of the line of consumption, MPC plays a vital role in forming the foundation of slope of the line of aggregate expenditure.
The other crucial role of MPC is that it affects multiplier process as well as the tax and expenditure multipliers’ magnitude. The formula that is used in calculating MPC is as follows:
|MPC||=||change in consumption|
change in income
This formula quantifies the induced consumption. Thus, it indicates the amount of extra dollar earned as additional income in a household that goes into consumption. For instance, if there is a change of $1 in the income, this affects the MPC value as well. Change in the consumption is induced by income and MPC measures the rate.
In addition, this formula shows that MPC is the actual measure of consumption line’s slope. Generally, this measurement is provided as rise over run. In consumption line, rise refers to change in the consumption while run refers to a change in household income.
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