Marginal propensity to consume and marginal propensity to store: Overview
Historically, consumer demand and consumption have helped drive the US economy. When American consumers have more additional income, they may spend some of it, thereby spurring economic growth. Consumers may also save some of their extra income.
These trends are more than just observations, they are the basis of marginal propensity to consume (MPS) and marginal propensity to consume (MPC).
- Marginal propensity to save (MPS) is the extra $ 1 of household income saved.
- MPC is part of your household’s income per dollar consumption or expenditure.
- Consumer behavior regarding savings and spending has a tremendous impact on the economy as a whole.
Marginal propensity to save
Marginal propensity to save (MPS) is the extra $ 1 of household income saved. MPS shows what the entire household sector does with additional income, specifically the percentage of additional income saved.
Since savings complement consumption, MPS reflects an important aspect of household activity and its consumption habits. Expressed as a percentage. For example, a marginal propensity to save 10% means that you save 10 cents for every additional dollar you earn.
Marginal propensity to save is calculated by dividing changes in savings by changes in income. For example, if a consumer saves 20 cents for every dollar he earns, his MPS will be .20 (.20 / $ 1) or 20%.
MPS reflects the leakage of savings or income from the economy. Leaks are the portion of income that is not returned to the economy through the purchase of goods or services. The higher your personal income, the higher your MPS, as your ability to meet your needs increases with your income. In other words, the wealthier an individual is, the less likely it is that an additional $ 1 will be spent. Studying MPS helps economists determine how wage growth affects savings.
Marginal propensity to consume
Marginal propensity to consume (MPC) is the flip side of MPS. MPC helps to quantify the relationship between income and consumption. MPC is part of your household’s income per dollar consumption or expenditure. For example, if you have a marginal propensity to consume 45%, you will spend 45 cents for every additional dollar you earn.
Economic theory tends to support that as income increases, so does spending and consumption. MPC measures that relationship to determine how much more spending per dollar of additional income will increase. MPC is important because it depends on your income level and is the lowest in high-income households.
Marginal propensity to consume is calculated by dividing changes in spending by changes in income. For example, if a consumer spends 80 cents for every $ 1 increase in income, the MPC will be .80 (.80 / $ 1) or 80%.
Imagine, for example, Congress wanting tax refunds to promote economic activity through personal consumption. MPC can be used to assess the likelihood of households most likely or prone to consume, rather than saving tax cuts, based on income.
MPC percentages can also be used by economists to determine how much of each $ 1 tax refund is spent. By doing so, they can adjust the total size of the rebate program to achieve the desired spending per household.
MPC is also essential to the study of Keynesian economics, which is the result of economist John Maynard Keynes. Keynesian economics was developed in the 1930s to understand the Great Depression. Keynes advocated higher government spending and lower taxes to stimulate demand and bring the global economy out of recession. How much the stimulus adds to economic growth is called the Keynesian multiplier.
MPC, like MPS, affects the multiplier process and affects the size of spending and tax multipliers. Ultimately, we will use both MPS and MPC to discuss how households use their surplus income and whether that income will be saved or used. Consumer behavior regarding savings and spending has a tremendous impact on the economy as a whole.