how do II caculate the marginal propensity to consume

1 answer

The marginal propensity to consume (MPC) is the change in consumption resulting from a change in disposable income. It measures the proportion of additional income that is spent on consumption.

To calculate the marginal propensity to consume, you can follow these steps:

1. Determine the change in consumption: Calculate the difference in consumption (C) between two different levels of disposable income.

2. Determine the change in disposable income: Calculate the difference in disposable income (Y) between the two levels.

3. Divide the change in consumption by the change in disposable income: Divide the change in consumption by the change in disposable income. Mathematically, it can be represented as:
MPC = ΔC / ΔY

For example, let's say an individual's consumption increases by $100 when their disposable income increases by $500. The calculation would be:
MPC = $100 / $500
MPC = 0.2

In this case, the marginal propensity to consume is 0.2, indicating that for every additional dollar earned, the individual spends 20 cents on consumption.

Please note that this calculation assumes a linear relationship between consumption and income, which may not always hold true in reality.