Average Propensity To Consume

Published Jul 31, 2023

Definition of Average Propensity to Consume

The Average Propensity to Consume (APC) is a measure that describes the fraction of total income that a household or an individual consumer spends on consumption of goods and services. It represents the relationship between consumer spending and total income.

Example

For example, consider Mary, who earns a monthly salary of $4000. She spends $3200 on various goods and services necessary for her daily needs. Thus, her average propensity to consume is calculated as follows:

APC = Total consumption expenditure / Total income
APC = $3200 / $4000
APC = 0.8

This means that Mary spends 80% of her total income on consumption. That leaves her with a savings rate of 20% or $800.

Why Average Propensity to Consume Matters

The average propensity to consume plays a crucial role in determining the overall well-being of an economy. It is an essential factor in analyzing consumer behavior and the impact of economic policies on the economy. The APC is used to study the relationship between the level of consumer spending and the overall level of economic activity.

A higher APC indicates greater consumer spending and is generally considered beneficial for economic growth. Conversely, a lower APC means that consumers are saving a larger fraction of their income, which could potentially lead to a decrease in growth. Therefore, it is critical for businesses and government policymakers to monitor and analyze APC when designing economic policies.