Important Differences Between APC and MPC

Average Propensity to Consume(APC)

The average propensity to consume (APC) is a measure of how much of their disposable income households or consumers typically spend. It is calculated as the ratio of consumption expenditure to disposable income. A high APC indicates that households or consumers tend to spend most of their income, while a low APC suggests that they tend to save a significant portion of their income. This ratio can vary across different income levels and demographic groups.

Examples of Average Propensity to Consume

• A household with an annual disposable income of $50,000 and annual consumption expenditure of $35,000 has an APC of 0.7. This means that the household spends 70% of their disposable income on consumption.
• A study of young adults in a certain city found that their APC was 0.9. This suggests that the majority of their disposable income was spent on consumption.
• An analysis of retirees’ spending patterns found that their APC was 0.4. This indicates that retirees tend to save a significant portion of their disposable income and spend less on consumption compared to other demographic groups.
• A country’s APC is 0.6. This suggests that the country’s citizens are saving a significant portion of their disposable income and is less likely to be in debt.
• A business owner found that his company’s APC was 0.2. This suggests that the company is saving a significant portion of its revenue and investing it in expansion or other growth opportunities.

Types of Average Propensity to Consume

There are two main types of average propensity to consume (APC):

1. Absolute APC: This measures the proportion of disposable income that is spent on consumption. It is calculated as the ratio of consumption expenditure to disposable income.
2. Marginal APC: This measures the proportion of an increment in disposable income that is spent on consumption. It is calculated as the ratio of the change in consumption expenditure to the change in disposable income.

In addition to these two main types, there are also some subcategories:

• Average Propensity to Consume out of Gross Income (APCgi)
• Average Propensity to Consume out of Gross Disposable Income (APCgdi)
• Average Propensity to Consume out of Net Disposable Income (APCndi)
• Average Propensity to Save (APS)
• Average Propensity to Invest (API)

Marginal Propensity to Consume (MPC)

The marginal propensity to consume (MPC) is a measure of how much an increase in income will increase consumption expenditure. It is calculated as the ratio of the change in consumption expenditure to the change in income. The MPC is important because it helps economists understand how changes in income affect overall economic activity. A high MPC suggests that consumers will spend a large proportion of any increase in income on consumption, which can lead to increased economic growth and higher levels of inflation. A low MPC, on the other hand, suggests that consumers are more likely to save a significant portion of any increase in income, which can lead to lower levels of economic growth and inflation.

MPC is also related to the concept of the marginal propensity to save (MPS), which is the proportion of an increment in income that is saved rather than spent on consumption. The sum of MPC and MPS is always equal to 1. MPC = 1 – MPS

It is worth to mention that MPC and APC are different concepts. MPC measures the change in consumption in response to a change in income, while APC measures the proportion of income that is spent on consumption.

Examples of Marginal Propensity to Consume (MPC)

A household receives a $1000 increase in income and their consumption expenditure increases by $800. The MPC for this household is 0.8, meaning that 80% of the increase in income was spent on consumption.

An economy experiences a sharp increase in GDP and a corresponding increase in consumption expenditure. The MPC for this economy is 0.9, indicating that a large proportion of the increase in income is being spent on consumption.

A study of consumers in a certain region found that their MPC was 0.6. This suggests that when their income increases, 60% of that increase is spent on consumption, while the remaining 40% is saved.

A company’s MPC is 0.2. This suggests that the company is investing a large proportion of its revenue in expansion and growth opportunities, rather than spending it on consumption.

A government’s MPC is 0.8. This suggests that most of the increase in government’s income is spent on consumption, which will likely lead to higher levels of inflation and increased government debt.

Types of Marginal Propensity to Consume (MPC)

There are two main types of marginal propensity to consume (MPC):

1. Direct MPC: This measures the proportion of an increment in income that is spent on consumption of goods and services. It is calculated as the ratio of the change in consumption expenditure to the change in income.
2. Indirect MPC: This measures the proportion of an increment in income that is spent on taxes. It is calculated as the ratio of the change in taxes to the change in income.

The sum of direct MPC and Indirect MPC is called the total MPC.

It’s worth mentioning that MPC is also related to the concept of the marginal propensity to import (MPM), which is the proportion of an increment in income that is spent on import goods rather than domestic goods. The sum of MPC, MPS and MPM is always equal to 1.

MPC + MPS + MPM = 1

Here is a table that compares the key differences between average propensity to consume (APC) and marginal propensity to consume (MPC):

Important Differences Between APC and MPC

4. Definition: Average Propensity to Consume (APC) refers to the proportion of disposable income spent on consumption, while Marginal Propensity to Consume (MPC) refers to the proportion of an increment in disposable income spent on consumption.
5. Calculation: APC is calculated by dividing consumption expenditure by disposable income, while MPC is calculated by dividing the change in consumption expenditure by the change in disposable income.
6. Indication: APC indicates the overall level of consumption expenditure in relation to disposable income, while MPC indicates how responsive consumption expenditure is to changes in disposable income.
7. Importance: APC helps understand the consumption behavior of households and consumers, while MPC helps economists understand how changes in income affect overall economic activity.
8. APC is a static measure that assumes that all other factors remain constant, MPC is a dynamic measure that captures the change in consumption with a change in income.
9. APC is a ratio, while MPC is a derivative and indicates the slope of the consumption expenditure curve with respect to income.
10. APC gives the overall picture of how much of the income is spent on consumption, while MPC gives the picture of how responsive consumption is to changes in income.

Conclusion Between APC and MPC

In conclusion, both Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) are important economic concepts that help economists and policymakers understand consumption behavior and the relationship between income and consumption. APC is a measure of the proportion of disposable income spent on consumption, while MPC is a measure of how responsive consumption is to changes in disposable income. They both provide different but complementary information.

APC helps economists understand overall consumption patterns and can be used to predict future consumption levels, while MPC can be used to analyze how changes in income, such as tax cuts or increases, will affect consumption and overall economic activity. By understanding both APC and MPC, economists and policymakers can make better-informed decisions about economic policy and identify areas where additional research is needed.