# Propensities to save and consume theory

Propensities to save and consume theory. Propensities to consumed is discussed under two groupings. If the total national income 620million and the total national consumption is 65million, calculate the APC

## PROPENSITIES TO CONSUME

Average propensity to consume (APC): The APC is defined as the proportion of the national income.

The formula is:

APC = Total National Consumption = C

Total National Income              Y

The APC decreases with increasing income levels.

Example

If the total national income 620million and the total national consumption is 65million, calculate the APC

Solution

APC    =          Total National Consumption

Total National Income

=          N5m

N20m = 0.4

• Marginal Propensity to consume (MPC): The MPC is defined as the relationship between changes in income and changes in consumption. It shows the extent to which the level of consumption changes as a result of a change in income. It therefore, shows the  proportion of any addition to income, which is used for consumption.

MPC    =          Changes in consumption =      DC

Changes in Income                 DY

Example

If the monthly income of an individual increases from N10,000.00 to N15,000.00 and increases his level of consumption from N4,00.00 to N6,000.00, calculate the marginal propensity to consume.

Solution

Initial income per month                     =          N10,000.00

New income per month                       =          N15,000.00

Changes in income (DY)

= (N15,000 – N10,000)                      =          N5,000.00

Initial consumption per month            =          N4,000.00

New consumption per  month

Changes in consumption (∆C)

= (N6,000 – N4,000) =          N2,000.00

MPC               =          ∆C

∆Y

=          N2,000.00

N5,000.00

=          0.4

## PROPENSITIES TO SAVE

Propensities to save is discussed under two groupings

1. Average propensity to save (APS): The average propensity to save (APS) is defined as a measure of the proportion of income which is saved (not spent on consumption). It shows the expected amount of savings at different levels of incomes

Total National Savings            =          S

Total National Income            =          Y

The APS increases with increasing income. As the level of incomes increases, one is able to save more money.

Note: APC + APS = 1

Example

If a firm earns annual income of 680m and spend 650m on procurement of working materials, calculate the APS of the firm which is definitely a propensity to save.

Solution

Total income               =          N80m

Total expenditure        =          N50m

Total savings

= (Total income – Total expenditure)

= N80m – N50m

= N30m

APS     =          Total Savings

Total Income

=          N30m

N80m  =          0.38

• Marginal propensity to save (MPS): The marginal propensity to save (MPS) is defined as a measure of the relationship between changes in the level of savings and changes in income. It shows the change in savings brought about by a change in income level.

MPS is calculated using this formula:

MPS    =          Changes in savings      =          ∆S

Changes in income      =          ∆Y

Example

If the daily income of factory worker increases from N500.00 to N700.00 and he increases his level of consumption by N80.00, calculate the marginal propensities to save and to consume.

Solution

Initial income per day             =          N500.00

New income per day               =          N700.00

Change in income (∆Y)

= (N700.00 – N500.00)          =          N200.00

Change in consumption (“C) =          N80.00

1. MPS    =          Changes in consumption

Changes in income

=          ∆C

∆Y

=          80

200

=          0.4

• MPC + MPS   =          1

MPS    =          1 – MPC

MPS    =          1 – .04

=          0.6

Alternatively

Changes in level of consumption        =          N80.00

Changes in level of savings

=          N200.00 – N80.00

=          N120.00

MPS = ∆S       =          N120.00

∆Y                   N200.00

=          120

200

=          0.6

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