The marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.
MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical "y" axis and the change in income on the horizontal "x" axis.
Marginal Propensity to Consume (MPC)
The marginal propensity to consume is equal to ΔC / ΔY, where ΔC is the change in consumption, and ΔY is the change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.
Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500).
The other side of the marginal propensity to consume is the marginal propensity to save, which shows how much a change in income affects levels of saving. Marginal propensity to consume + marginal propensity to save = 1. In the suit example, your marginal propensity to save will be 0.2 ($100 divided by $500).
If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500), and your marginal propensity to save will be 1 ($500 divided by 500).
