Business, Legal & Accounting Glossary
Average propensity to consume (APC) is the proportion of annual income spent on consumption of goods and services. It is essentially nothing more than the average expenses of a household.
To calculate the percentage of average propensity to consume, consumption (C) is divided by income (Y). The identity that defines average propensity to consume is given below:
APC = C / Y
If, for example, the APC is 0.85, then 85% is used on consumption.
Demand for goods and services is lower in economies where individual consumer saves a considerable part of his income. In such a situation, although savings are beneficial for an individual, it is disadvantageous for the economy as a whole.
Disposable income is often used as a denominator to calculate average propensity to consume. It is indicated through the following identity:
APC = C / Y-T
Accordingly, average propensity to consume (APC) equals consumption (C) divided by pre-tax income (Y) minus taxes (T). Y-T stands for disposable income.
Below is a table which demonstrates some hypothetical examples:
Average propensity to save (APS) is the proportion of annual income spent on savings. In simple terms, APS is the average saving. Saving can be determined as the difference between income and consumption. Thus saving is also related to income. Average propensity to save is the inverse of APC.
In order to calculate average propensity to save, saving (S) is divided by income (Y). Thus the identity that defines APS is:
APS = S / Y
Thus, APS and APC together determine the level of income.
Marginal propensity to consume (MPC) is the proportion of change in consumption due to change in income. Thus,
MPC = change in consumption / change in income
Marginal propensity to save (MPS) is the proportion of change in saving due to change in income. Thus,
MPS = change in saving/change in income
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This glossary post was last updated: 29th March, 2020 | 61 Views.