Marginal Propensity To Consume (Mpc) Definition & Examples

Published Oct 25, 2023

Definition of Marginal Propensity to Consume (MPC)

The Marginal Propensity to Consume (MPC) is a concept used in economics to measure the change in consumption that occurs in response to a change in disposable income. It represents the proportion of additional income that is spent on consumption rather than being saved or used for other purposes. The MPC is a key component in determining the overall level of aggregate demand in an economy.

Example

Let’s say that Emily receives a bonus of $1,000. She decides to spend $600 of it on a new television and save the remaining $400. In this case, Emily’s marginal propensity to consume is 0.6 ($600 divided by $1,000). This indicates that for every additional dollar of disposable income that Emily receives, she tends to spend 60 cents on consumption.

Now, let’s consider another scenario where Jack receives the same bonus of $1,000 but has a marginal propensity to consume of 0.8. Jack decides to spend $800 on a vacation and saves the remaining $200. This means that Jack spends 80 cents out of every additional dollar of disposable income.

The difference in marginal propensities to consume between Emily and Jack highlights their different spending behaviors. Emily tends to save a higher proportion of her income compared to Jack, who has a higher propensity to consume.

Why Marginal Propensity to Consume Matters

Understanding the marginal propensity to consume is important for policymakers and economists in assessing the potential impact of changes in income on consumption levels and overall economic activity. A higher MPC indicates that an increase in disposable income will lead to a larger increase in consumption, which can stimulate demand in the economy. This is especially relevant in the context of fiscal policies, such as tax cuts or income transfers, which aim to boost consumer spending and stimulate economic growth.

Additionally, the MPC plays a crucial role in the calculation of the multiplier effect, which measures the overall impact of changes in spending on the economy. By understanding how changes in disposable income affect consumption, policymakers can make more informed decisions regarding fiscal and monetary policies to promote economic stability and growth.