Chapter 8, Problem 1QP

To determine

Difference between the average propensity to consume (APC) and the marginal propensity to consume (MPC).

Explanation of Solution

APC is an average where the total amount spent on consumption is compared to the total income earned. Hence, it is calculated as follows:

$\text{APC}=\frac{\text{Total spending on consumption}}{\text{Total income}}$

However, in the case of MPC, it is associated to the changes that occur in income and spending. Hence, MPC is calculated as follows:

$\text{MPC}=\frac{\text{Change in consumption}}{\text{Change in income}}$

When there is in increase in the income, two choices that are available are either to spend or to save the money. As MPC is associated to changes on spent income, the amount that is not spent will have to be saved and this becomes MPS. Hence, the numerator will have change in the money spent or saved and when added together it has to be the total change in income. Hence, the denominator will have the total change in income. One will be the result when adding MPS and MPC.

Economics Concept Introduction

APC (APC): Average propensity to consume refers to the consumption per unit.

Marginal propensity to consume (MPC): Marginal propensity is to consume change in the level of consumption due to change in one unit of the disposable income.