propensity to consume

Marginal Propensity to Consume

In Keynesian economics, the amount of a person's increase in income spent on goods and services as opposed to saved. It is measured as a ratio of a change in consumption to a change in income. For example, if one receives a $5,000 raise in salary and spends $3,000, the MPC is 0.6. Factors affecting the MPC include interest rates and the relative expense of goods and services. See also: Marginal propensity to save.
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propensity to consume

the proportion of NATIONAL INCOME that is spent by households on CONSUMPTION of final goods and service. The average propensity to consume (APC) is given by:

The marginal propensity to consume (MPC) is the fraction of any change in income that is spent:

Alternatively, consumption can be expressed as a proportion of DISPOSABLE INCOME.

In the simple CIRCULAR FLOW OF NATIONAL INCOME MODEL, all disposable income is either consumed or saved. It follows that the sum of the MPC and the MARGINAL PROPENSITY TO SAVE always adds up to 1.

A rise in the propensity to consume increases consumption expenditure for a given income level, for example from OC to OC1 at income level Y in Fig. 162. This increases the consumption injection into the circular flow of national income and results in an increase in aggregate demand and national income. See MULTIPLIER, CONSUMPTION EXPENDITURE.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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