CONSUME Total Income : , Amount Spent : , Income Increase : , Increase Spent : , Marginal Average Propensity to Consume % Marginal Propensity to Consume % c y s y ∆s ∆y - - Consumption and Investment Functions ( ) The Average Propensity to Consume: The average propensity to consume is the ratio of consumption expenditure to any particular level of income.” Algebraically it may be expressed as under: Where, C= Consumption Y = Income ( ) The Marginal Propensity to Consume: The marginal propensity to consume may be defined as the ratio of the change in the consumption to the change in income. Algebraically it may be expressed as under: Where, ΔC= Change in Consumption ΔY = Change in Income MPC is positive but less than unity ( ) The Average Propensity to Save (APS) : The average propensity to save is the ratio of saving to income. APC = C Y MPC = ∆C ∆Y < ∆C ∆Y < APS is the quotient obtained by dividing the total saving by the total income. In other words, it is the ratio of total savings to total income.
It can be expressed algebraically in the form of equation as under Where, S= Saving Y=Income ( ) The Marginal Propensity to Save (MPS) : Marginal Propensity to Save is the ratio of change in saving to a change in income. MPS is obtained by dividing change in savings by change in income. It can be expressed algebraically as ΔS = Change in Saving ΔY= Change in Income Since MPC+MPS= MPS= -MPC and MPC = - MPS Generally the average ie APC is expressed in percentage and the MPC in fraction. APS = S Y MPS = ∆S ∆Y - - Consumption and Investment Functions Table: Calculation of APC, MPC, APS and MPS Income Y Consumption C APC % C/Y APS % S/Y MPC ΔC/ΔY MPS ΔS/ΔY ( / ) = ( / ) = - - ( / ) = ( / ) = .
Keynes’ Psychological Law of Consumption: Keynes propounded the fundamental Psychological