Average Propensity to Consume and Save: Videos & Practice Problems

The average propensity to consume (APC) is calculated as total consumption divided by total disposable income, while the average propensity to save (APS) is total savings divided by total income. In contrast, the marginal propensity to consume (MPC) and marginal propensity to save (MPS) focus on the change in consumption and savings with an additional dollar of income. Understanding these concepts is crucial for analyzing consumer behavior and the impact on aggregate demand, which influences economic cycles and fiscal policy decisions.

Average Propensity to Consume and Save

Alright. So let's talk a little bit more about the propensity to consume with the average and the marginal propensity to consume. So, we probably already talked about marginal propensity to consume, marginal propensity to save, but sometimes we talk about the average propensity to consume or save. So remember, when we talk about disposable income, we have disposable income left after we pay for taxes. Well, we're either going to use it for consumption or savings, right? So we can use these formulas here to get some grasp on how much we're consuming, how much we're saving, and our rates of consumption savings. So we talk about average propensity to consume or save, we think in total amounts. So we're thinking about total amounts here. So, what is the total amount of consumption? What is the total amount of savings? Right? And that's true for both of these.

So, we're going to take the average propensity to consume which is going to be consumption divided by the total level of income, generally disposable income here. The same thing with the average propensity to save, we've got savings divided by income and marginal propensity to consume and save. So remember, when we talk about marginal, well, marginal is the idea of one more, right? We have one more, one dollar more of income. How much of it are we going to consume? How much of it are we going to save? So, when we're dealing with marginal, we always have to think about the change. What is the change in consumption? How much extra consumption did we do when we had extra income? The same with savings, right? Marginal propensity to save, how much extra saving do we do when we have extra income? Cool? So let's go ahead and use these formulas and do some practice problems here.

If the Keynesian consumption function is C = 10 + 0.8 Yd then, when disposable income is $1000, what is the average propensity to consume?

• A. $0.8
• B. $800
• C. $810
• D. $0.81
• E. Cannot be determined

Answer: (D)

If the Keynesian consumption function is C = 10 + 0.8 Yd then, when disposable income is $1000, what is the marginal propensity to save?

• A. 0.8
• B. 0.81
• C. 0.19
• D. 0.2
• E. Cannot be determined

Answer: (D)

Here’s what students ask on this topic:

What is the average propensity to consume (APC) and how is it calculated?

The average propensity to consume (APC) is a measure of the proportion of total disposable income that is spent on consumption. It is calculated using the formula:

$\frac{C}{Y}$

where $C$ represents total consumption and $Y$ represents total disposable income. Essentially, APC tells us what fraction of income is used for consumption. For example, if a household has a disposable income of $50,000 and spends $40,000 on consumption, the APC would be 0.8 or 80%.

What is the difference between average propensity to consume (APC) and marginal propensity to consume (MPC)?

The average propensity to consume (APC) and the marginal propensity to consume (MPC) are both measures of consumption behavior, but they differ in their focus. APC is the ratio of total consumption to total disposable income, calculated as:

$\frac{C}{Y}$

where $C$ is total consumption and $Y$ is total disposable income. In contrast, MPC measures the change in consumption resulting from a change in income, calculated as:

$\frac{\mathrm{\Delta C}}{\mathrm{\Delta Y}}$

where $\mathrm{\Delta C}$ is the change in consumption and $\mathrm{\Delta Y}$ is the change in income. While APC looks at overall consumption relative to income, MPC focuses on the incremental changes in consumption with changes in income.

How do you calculate the average propensity to save (APS)?

The average propensity to save (APS) is a measure of the proportion of total disposable income that is saved rather than spent on consumption. It is calculated using the formula:

$\frac{S}{Y}$

where $S$ represents total savings and $Y$ represents total disposable income. For example, if a household has a disposable income of $50,000 and saves $10,000, the APS would be 0.2 or 20%. APS helps in understanding the saving behavior of households relative to their income.

Why is understanding the average propensity to consume and save important for economic analysis?

Understanding the average propensity to consume (APC) and save (APS) is crucial for economic analysis because these metrics provide insights into consumer behavior and the overall economy. APC indicates the proportion of income spent on consumption, which directly affects aggregate demand. Higher consumption can stimulate economic growth, while lower consumption can lead to economic slowdowns. APS, on the other hand, shows the proportion of income saved, which can influence investment levels and future economic growth. Policymakers use these metrics to design fiscal policies, such as tax cuts or stimulus packages, to manage economic cycles and promote stability and growth.

How do changes in disposable income affect the marginal propensity to consume (MPC) and save (MPS)?

Changes in disposable income directly impact the marginal propensity to consume (MPC) and save (MPS). MPC measures the change in consumption resulting from a change in income, calculated as:

$\frac{\mathrm{\Delta C}}{\mathrm{\Delta Y}}$

where $\mathrm{\Delta C}$ is the change in consumption and $\mathrm{\Delta Y}$ is the change in income. Similarly, MPS measures the change in savings resulting from a change in income, calculated as:

$\frac{\mathrm{\Delta S}}{\mathrm{\Delta Y}}$

where $\mathrm{\Delta S}$ is the change in savings. When disposable income increases, households decide how much of the additional income to spend (MPC) and how much to save (MPS). These decisions influence aggregate demand and savings rates, impacting economic growth and stability.