Marginal propensity to consume and save. Marginal propensity to consume - formula

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

With an increase in income, any person begins to spend more and save for something. It would seem that in practice everything is quite simple - more money means more than anything else. In fact, there are a number of concepts, theories, various formulas and relationships in economics that describe, calculate and explain this phenomenon. These include the propensity to consume (marginal, average), to save, the Keynesian basic psychological law, etc. Knowledge and understanding of these economic terms and laws makes it possible to evaluate habitual phenomena in a different way, as well as their causes and patterns, to they bring.

Founder

The concept of "marginal propensity to consume and save" appeared in the 20-30s. the last century. Its inEconomic theory was introduced by the Englishman John Maynard Keynes. By consumption, he meant the use of various goods to satisfy the physical, spiritual or individual needs of one person or group of people. By saving, Keynes designated that part of income that was not spent on consumption, but was saved in order to be used in the future with greater benefit. The economist also revealed the basic psychological law, according to which, with an increase in income, the amount of consumption will certainly increase (the range of goods expands, cheap goods are replaced by more expensive ones, etc.), but not so fast (not proportionally). In other words, the more a person or a group of persons receives, the more they spend, but also the more they have left for savings. Based on his theory, Keynes developed such concepts as the average and marginal propensity to consume (the formula for its calculation was also derived), as well as the average and marginal propensity to save and the methodology for calculating it. In addition, this eminent economist identified and established a number of relationships between these concepts.

Consumption calculation

The marginal propensity to consume is equal to the ratio of change in consumption to change in income. It represents the proportion of changes in consumer spending per unit of income that led to them. This concept is usually denoted in Latin letters MPC - short for English marginal propensity to consume. The formula looks like this:

MPC=Changes in consumption/changes in income.

Calculation of savings

Like the propensity to consume, the marginal propensity to save is calculated as the ratio of changes in savings to changes in income. It expresses the share of changes in savings that occurs for each monetary unit of additional income. In the literature, this concept is denoted by MPS - an abbreviation for the English marginal propensity to saving. The formula in this case is:

MPS=Change in savings/change in income.

Example

Calculation of indicators such as marginal propensity to consume or saving are quite simple.

Initial data: the consumption of the Ivanov family in October 2016 amounted to 30,000 rubles, and in November - 35,000 rubles. Income received in October 2016 is 40,000 rubles, and in November - 60,000 rubles.

Savings 1=40,000 – 30,000=10,000 rubles.

Savings 2=60,000 – 35,000=25,000 rubles.

MPC=35,000 -30,000 / 60,000 – 40,000=0, 25.

MPS=25,000 - 10,000 / 60,000 - 40,000=0, 75.

Thus, for the Ivanov family:

Marginal propensity to consume is 0.25.

Marginal propensity to save is 0.75.

Relationships and dependencies

The marginal propensity to consume and save per one monetary unit with the same initial data should sum up to one. It follows thatnone of these values as a result of calculations can be greater than 1. Otherwise, you need to look for errors or inaccuracies in the original data.

In addition to income, other factors can affect these indicators:

• We alth accumulated by households (securities, real estate). The larger their value, the lower the savings rate and the higher the consumption rate. This is due to the cost of maintaining property, and maintaining a certain standard of living, and the absence of an urgent need for savings.
• Increasing various taxes and fees could significantly reduce both savings and spending.
• Increase in supply in the market contributes to the growth of consumption and, consequently, to the decrease in the level of accumulation. This is especially acute when a new product or service appears (as a result of scientific and technological progress), as a new need appears that did not exist before.
• Economic expectations may trigger the growth of both one indicator and the second. For example, the expectation of a rise in the price of a product can provoke its excessive consumption (procurement for the future), which will negatively affect savings.
• Unforeseen significant price increases will affect the consumption and savings of different social groups in different ways.

Analysis features

There are several points to consider when analyzing indicators such as marginal propensity to consume, as well assavings. What are these moments? First, if the marginal propensity to consume is practically one, then there is a lack of income or a low level of income growth compared to the growth of physical and spiritual needs. Most often, this pattern emerges in developing countries with unstable economies or during periods of financial and economic crises.

Secondly, the calculation of these indicators for individuals or families for the economy of a country or industry is not very informative, therefore, most often they consider a certain combination of consumption and savings (households, social groups, etc.). At the same time, a number of provisions of Keynesian theory are used. For example, consumption is a function of disposable income.

Thirdly, for analysis, indicators are usually used not for two periods (as indicated in the calculation example), but for values of longer periods of time. Then the results are shown graphically, which makes it possible to more clearly study and analyze the dynamics. The constructed charts are called Keynesian functions and often appear in the analysis of various economic phenomena.