Distinguish between propensity to consume and propensity to save with the help ofnumerical example
Propensity to consume depicts the level of consumption at different levels of disposable income. In other words, it shows the amount of consumption corresponding to the different income levels. It can be expressed either in aggregate terms or in proportionate terms. Accordingly, there are two related measures of propensity to consume- Average Propensity to Consume and the Marginal Propensity to Consume.
Average Propensity to Consume (APC) expresses the propensity to consume in aggregate terms. It shows the ratio of consumption expenditure to the level of income. Algebraically,
Marginal Propensity to Consume expresses the propensity to consume in proportionate terms. It refers to the ratio of change in the consumption expenditure and change in the disposable income. Algebraically,
Propensity to save refers to the proportion of income or increased income that is saved. Propensity to save can be expressed in aggregate term or in proportionate terms. Accordingly, there are two related concepts of propensity to save- Average Propensity to Save (APS) and Marginal Propensity to Save (MPS).
Average Propensity to Save (APS) refers to the ratio of savings to the level of disposable income. This is also known as Saving Ratio, as it is expressed as a ratio of income saved and disposable income (Yd). Algebraically,
Marginal Propensity to Save (MPS) refers to the ratio of change in savings due to a change in the disposable income. Algebraically,
Consider the following numerical example. Here, we calculate the different related concepts of propensity to consume and propensity to save.
Saving (Y – C)