In this lecture, We are going to discuss what is propensity to consume and its types as per the syllabus of Macro-Economics class 12 CBSE Board.
we will also discuss what is Average propensity to consume and marginal propensity to consume. Their formulas and maximum and minimum values.
What is Propensity to consume and its Definition
Propensity to consume means proportion of income spent on consumption.
Types of Propensity to consume
There are two types of propensity to consume.
What is Average propensity to consume (APC):-
When the proportion of income spent on consumption is expressed as a ratio between total consumption expenditure and total income. It is termed as Average propensity to consume (APC).
Formula of Average Propensity to consume
APC = Total Consumption Expenditure/Total Income = C/Y
For example, if income is ₹ 1000 and consumption ₹ 600. We can say
APC = 600/100 = 0.60
The Different Values of APC
- The value of APC can be greater than 1. As, when income is very low, there is a minimum consumption level that is greater than the present income.
For example, minimum expenditure is ₹ 120 and income is ₹ 100. In this case
APC = 120/100 = 1.2
- The value of APC can not be negative. As, consumption can not be negative at any given level of income.
- The value of APC can not be zero. As any given level of income consumption can not be zero. there is always a minimum consumption at least for survival even if income is zero.
- The value of APC can be less than 1. As at any given level of income consumption can be less than the income.
What is Marginal Propensity to Consume
The ratio (proportion) of change in consumption expenditure to change in income, is called Marginal Propensity to consume (MPC).
Formula of Marginal Propensity to Consume
MPC = Change in Consumption Expenditure/Change in income
Different Values of Marginal Propensity to Consume
- The value of marginal propensity to consume can not be more than 1. As, the consumer can not spend more than increase in income.
- The value of marginal propensity to consume can not be negative. As there can not be negative consumption with respect to increase and decrease in income.
- The value of MPC can be zero. As, it is possible whole increase in income is saved.
- The value of MPC can be less than 1, As, it is possible increase in consumption is less than with respect to increase in income.
- The value of MPC can be equal to 1. As, it is possible increase in consumption is equal to increase in income.
Hence it is concluded, the value of MPC lies between 0 to 1. That can be represented as 0 ≤ MPC ≥ 1.