Marginal Propensity

to Consume
Discussed by: Loba & Tan

Consumption
using up of a resource

2015

Keyness
Keyness psychological
psychological law
law of
of
consumption
consumption
men
men are
are disposed
disposed as
as aa rule
rule and
and
on
on the
the average
average to
to increase
increase their
their
consumption
consumption as
as their
their income
income
increases
increases but
but not
not by
by much
much as
as the
the
increase
increase in
in their
their income
income

Relationships of income and

consumption
as income increases, consumption
also increases
the increased income will be
divided in some proportion
between consumption and saving
increase in income always leads to
increase in both consumption and
saving
2015

Consumption function

Consumption

Consumption
equals to
disposable
income
45 degrees
Reference line
break-even
income
Disposable income

2015

marginal
propensity

2015

additional
tendency

Disposable Income
most important factor in how much
spending consumers make
amount of money that households
have available for spending and
saving after taxes have been
accounted for

Generally,
Income minus
taxes

Marginal propensity to consume

the ratio of change in

MPC = Change in
consumption
consumption to the change in
Change in income
income
measurement of willingness
Remember:
to consume with a marginal
MPC + MPS = 1
increase in disposable income

Example
Worker with salary of P8,000 raised
to P8,200

P200

Save P50 Spend P150

How much do I spend and save?
Increase in
compensation of
P200

2015

MPC = Change in
consumption
Change in income

15
MPC =
0
20
0

Marginal propensity consumption = .75 or 75%

Multiplier effect
More spending results in higher
GDP
Initial change in spending
changes GDP by a multiple

Marginal Propensity to Consume

1
Multiplier =
1 - MPC
or

1
Multiplier =
MPS
2015

Example
Worker with salary of P8,000 raised
to P8,200

Save P37.5
Increase in
compensation of
P150

Spend P112.5

Continuous

How much do I spend and save?

Increase in
compensation of
P200

Spend P150
MPC = 75% Think about it
Save P50

2015

Spending P200 impacted the economy

a lot more.
9

1
Multiplier =
1 - .75
=4
P200 x 4 = P800

The
The multiplier
multiplier degrades
degrades
Spending P200 will have a P800 impact on the economy.
it
gets
lower
since
we
it gets lower since we
save
save
If MCP = 50%
it
it travels
travels to
to the
the economy
economy
1
less
Multiplier =
less
1 - .50
=2
P200 x 2 = P400
It will have P400 less impact on the economy.

2015

10

End of discussion