PROPENSITY TO CONSUME AND
PROPENSITY TO SAVE.
PROPENSITY TO CONSUME
• Propensity to consume mean proportion of
income spent on consumption.
• The relationship between consumption and
income is called propensity to consume or
consumption function. Propensity to consume is of
two types
A) Average propensity to consume (APC)
B) Marginal propensity to consume (MPC)
• APC: It refers to the ratio of total consumption
to total income.
APC=C/Y.
Y C APC=C/Y
0 50 α
• 50 75 1.5
100 100 1
200 150 0.75
300 200 0.67
400 250 0.62
500 300 0.6
• Properties or Features of APC
• 1. APC=1(When C=Y).i.e Break even point.
• 2. APC>1, When C>Y
• 3. APC<1, When C<Y
• 4. APC falls with increase in income
• 5. APC can never be ZERO because consumption is never zer0
• Marginal propensity to Consume: It refers to
the ratio of change in consumption to change
in income.
• MPC=ΔC/ΔY
Y C ΔC ΔY MPC
0 50 - - -
50 75 25 50 0.5
100 100 25 50 0.5
200 150 50 100 0.5
300 200 50 100 0.5
400 250 50 100 0.5
500 300 50 100 0.5
• Properties or Features of MPC
• 1. Value of MPC ranges between 0-1
• 2. Value of MPC can be 1, if entire additional income is spent,i.e ΔC=ΔY
• 3. Value of MPC can be 0, if entire additional income is saved,i.e ΔC=0
• 4. MPC of developing countries is more than MPC of developed countries
• as the developing countries need to spend on basic needs more than the
developed countries.
PROPENSITY TO SAVE
• Propensity to save is the proportion of
income saved.
• The relationship between saving and income
is called propensity to save or saving function.
Propensity to save is of two types
• A) Average propensity to save (APS)
• B) Marginal propensity to save (MPS)
• APS: It refers to the ratio of total saving to
total income.
• APS=S/Y.
Properties or Features of APS
1. APS=0(When C=Y).i.e Break even point or when saving is zero
2. APS can never be 1, because saving can never be equal to income.
3. APS can never be more than 1 because savings can not be more than income.
4. APS can be negative(When C>Y)
5. APS rises with rise in income.
• Marginal propensity to save: It refers to the
ratio of change in saving to change in income.
• MPS=ΔS/ΔY
Y C S ΔS ΔY MPS
0 50 -50 - - -
50 75 -25 25 50 0.5
100 100 0 25 50 0.5
200 150 50 50 100 0.5
300 200 100 50 100 0.5
400 250 150 50 100 0.5
500 300 200 50 100 0.5
• Properties or Features of MPS
• 1. Value of MPS ranges between 0-1
• 2. Value of MPS can be 0, if entire additional income is consumed ,i.e
ΔC=ΔY, S=0
• 3. Value of MPS can be 1, if entire additional income is saved, i.e ΔC=0
• 4. MPS can not be greater than 1 because ΔS cannot be greater than ΔY.
Relationship between
There is relationship between APC and APS.
• APC+APS=1
𝐶 𝑆
• = +
𝑌 𝑌
𝐶+𝑆 𝑌
• = = =1 (C+S=Y)
𝑌 𝑌
• APC=1-APS.
There is relationship between MPC and MPS.
• MPC+MPS=1
• 1-MPC=MPS.
• There is relationship between MPC and MPS.
• MPC+MPS=1
∆𝐶 ∆𝑆
• = +
∆𝑌 ∆𝑌
∆𝐶+∆𝑆 ∆𝑌
• = = =1 (ΔC+ΔS=ΔY)
∆𝑌 ∆𝑌
• 1-MPC=MPS.
PRACTICE QUESTIONS
• Given below is the consumption function of
an economy:
• C=100 + 0.5Y
• With the help of numerical example show that
in this economy, as income increases , APC will
decrease.
Practice Questions
Y C S I AD AS
300 0 60
450 30 60
600 60 60
750 90 60
900 120 60
1050 150 60
Practice Questions
• Complete the following table:
Y C MPC MPS
400 240
500 320
600 395
700 495
Practice Question
• Complete the following table:
Y MPC S APS
0 - -90
100 0.6 -50
200 0.6 -10
300 0-6 30
Complete the table
Y C MPC MPS
300 300 - -
400 375 ---- 0.25
500 445 0.70 ----
600 510 ----- 0.35
TYPES OF INVESTMENT
BASIS AUTONOMOUS INVESTMEST INDUCED INVESTMENT
MEANING Autonomous investment are those Induced investment are those
investment which is independent investment are dependent on the
of the level of income. level of income.
Investors It is generally done by the It is generally done by the
government sector. government sector and private
sector.
Income It is income inelastic. It is income elastic
elasticity
Motive Do not influenced by profit motive It is influenced by profit motive.
curve
Meaning of Ex-ante saving and
investment
• ‘Ex-ante’ simply means ‘intended’ or ‘planned’
• So ex-ante investments means investments planned to
be made at different level of income in an economy
during a period of a year. It is also known as planned or
desired investment.
• ex-ante saving means savings planned to be made at
different level of income in an economy during a
period of a year. It is also known as planned or desired
saving
• Equilibrium in the economy occurs when planned
investments and savings are equal.
• If planned savings is not equal to planned investment,
then output will have to be adjusted.
Meaning of Ex-post saving and
investment
• ‘Ex-post’ simply means ‘actual’ or ‘realized’
• So ex-post investments means actual or
realized investments in an economy during a
period of a year.
• ex-post saving means actual or realised
savings in an economy during a period of a
year.
Concept of Employment
• Full employment: Full employment refers to a
situation in which no one is unemployed
i.e.…there is no involuntary unemployment.
According to Keynes full employment signifies a
level of employment where increase in
aggregate demand does not lead to an increase
in the level of output and employment.
• Increase in demand beyond full employment
causes prices to go up or inflation.
FULL EMPLOYMENT
• Involuntary unemployment refers to a
situation in which people are ready to
work at prevailing wage rate, but do not
find work.
• voluntary unemployment : refers to a
situation in which people are not ready
to work at prevailing wage rate, even
though the work is available to them.
So all such people are not included in
labour force
UNDER EMPLOYMENT EQUILIBRIUM
• When AD is not sufficient to match the full
employment output AD and AS become equal
at less than full employment level of output.
This is called under employment equilibrium.
UNDER EMPLOYMENT EQUILIBRIUM
OVER FULL EMPLOYMENT LEVEL
• It refers to a situation when AD is equal to AS
beyond the level of full employment level.
• It occurs after the full employment level.
