Distinguish between MPC and MPS

Subject Economics Set: 3.(b) Marks: 4 Year: 2012

## Marginal Propensity to Save

The marginal propensity to save (MPS) is the portion of each extra dollar of a household’s income used for saving. This can be calculated by dividing changes in saving by changes in income. The marginal propensity to save plays a starring role in Keynesian economics, quantifying the saving-income relation, which is the flip side of the coin to the consumption-income relation. The MPS indicates what the overall household sector does with extra income. Specifically, it indicates the percent of extra income that is saved by households. As saving is a complement of consumption, the MPS reflects key aspects about a household’s activity and its consumption habits.

## Marginal Propensity to Consume

The marginal propensity to consume (MPC) is the portion of each extra dollar of a household’s income used in extra expenditures. This is calculated by dividing changes in consumption by changes in income. The MPC plays a key role in Keynesian economics in that it quantifies the consumption-income relation. The MPC indicates the portion of a household’s additional income that is used for consumption and expenditures.

Mathematical Relationship between MPC and MPS!

The sum of MPC and MPS is equal to unity (i.e., MPC + MPS = 1).

For sake of convenience, suppose a man’s income Increases by Rs 1. If out of it, he spends 70 paise on consumption (i.e., MPC = 0.7) and saves 30 paise (i.e., MPS = 0 3) then MPC + MPS = 0.7 + 0.3 = 1.

MPC + MPS = I as proved below. We know that income (Y) is either spent on consumption (C) or saved (S).

Symbolically:

Y =C + S

or

∆Y = ∆C + ∆S

By dividing both sides by AY, we get:

∆Y/∆Y = ∆C/∆Y = ∆S/∆Y

or

I = MPC + MPS

From this, the relationship can also be expressed in the following way:

MPC =1-MPS

MPS =1-MPC

Clearly if one is given, we can find out the other because the sum of MPC and MPS is equal to unity, i.e., Incremental (additional) income.

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