Aggregate Expenditure Model

MPC, MPS, APC and APS

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Christian Bien

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Marginal Propensity to Consume and Marginal Propensity to Save
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The MPC makes up the gradient of the consumption line and the MPS makes up the gradient of the savings line in the consumption function.

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Marginal Propensity to Consume
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The Marginal Propensity to Consume (MPC) measures the increase in household consumption from an increase in household income. To calculate MPC: MPC = (Change in Consumption)/(Change in Disposable Income)

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Consumption
Consumption Function
MPC, MPS, APC and APS
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Aggregate Expenditure Model
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Can you calculate the MPC from the model below?

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Answer: Change in Consumption (Consumer Spending): = 600-500 = 100 Change in Disposable Income: = 900-500 = 400 MPC: = 100/400 = 0.25

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Average Propensity to Consume (APC)
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Average Propensity to Consume measures the proportion of income spent on consumption. 

APC = Total Consumption/Total Disposable Income 


Can you find what the APC is from figure 1? 




Answer: Total Consumption = 600 Total Disposable Income = 900 APC = 600/900 = 0.67 Note: As income increases, the APC decreases.

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Marginal Propensity to Save
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Marginal Propensity to Save (MPS) measures the increase in savings from a given increase in household income. 


MPS = (Change in Savings)/(Change in Disposable Income) OR MPS = 1 - MPC 


Can you find what the MPS is from figure 2? 


Answer: 

Method 1 

Find MPC Change in Consumption = 625-500 = 125 

Change in Disposable Income = 1000-500 = 500 MPC = 125/500 = 0.25 

MPS = 1 -0.25 = 0.75 


Method 2 

Find MPS Change in Savings = 375 - 0 

(Note: the savings level at a disposable income of 500 is 0) = 375 

Change in Disposable Income = 1000-500 = 500 MPS = 375/500 = 0.75

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Average Propensity to Save (APS)
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Average Propensity to Save (APS) measures the total proportion of income that is saved. 


APS = Total Savings/ Total Income 


Can you find the APS of figure 2? 



Answer: 

Total Savings = 375 

Total Income = 1000 

APS = 375/1000 = 0.375 

Note: As income increases, the APS increases.

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