Distinguish between MPC and MPS

Subject Economics
NU Year 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.

Login to post your comment.