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.
If the total national income 620million and the total national consumption is 65million, calculate the APC
APC = Total National Consumption
Total National Income
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
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.
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
PROPENSITIES TO SAVE
Propensities to save is discussed under two groupings
- 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
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.
Total income = N80m
Total expenditure = N50m
= (Total income – Total expenditure)
= N80m – N50m
APS = Total Savings
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
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.
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
- MPS = Changes in consumption
Changes in income
- MPC + MPS = 1
MPS = 1 – MPC
MPS = 1 – .04
Changes in level of consumption = N80.00
Changes in level of savings
= N200.00 – N80.00
MPS = ∆S = N120.00