In this video we’ll learn about four terms and their corresponding calculations.
These include the average and marginal propensities to consume and save.
In economics, we assume that consumers can either spend their money or save it.
There are no alternative uses of money and all spending falls under either category.
We’ll be examining the average and marginal propensities for both consumption and saving
in this video.
Let’s start with the average propensities first.
The average propensity to consume (APC) is calculated by dividing a consumer’s total
consumption (C) by their total disposable income (DI).
If I spent $90,000 out of my $100,000 salary my APC is 0.9.
The average propensity to save (APS) is calculated by dividing a consumer’s total savings (S)
by their total disposable income (DI).
If I save $10,000 out of my $100,000 salary my APS is 0.1.
The marginal propensity to consume (MPC) is the additional proportion of consumption (ΔC)
that takes place after an individual experiences an increase in disposable income (ΔDI).
If my disposable income increases from $100,000 to $110,000 and I spend an additional $6,000
from that $10,000 increase, then my MPC is 0.6.
The marginal propensity to save (MPS) is the additional proportion of savings (ΔS) that
takes place after an individual experiences an increase in disposable income (ΔDI).
If my disposable income increases from $100,000 to $110,000 and I save an additional $4,000
from that $10,000 increase, then my MPS is 0.4.
To strengthen your understanding let’s do some practice calculations.
For this problem, I’ll share some a table with disposable income, consumption and savings
data.
You’ll need to use this information to calculate the average propensity to save and consume.
I’ve listed the disposable income for an individual here along with their total consumption
and total savings at each step of the way.
You’ll need to calculate the APC and APS from this data.
Pause the video here and press play when you are ready to check your answers.
Your answers should match what you see here.
To calculate APC we just divide consumption by disposable income.
Similarly for APS we divide savings by disposable income.
There may be slight variations due to the number of decimal places but more or less
your answers should align with these figures.
If you’re wondering how someone can spend money when they have zero disposable income,
they are able to fund that spending by using their savings or potentially borrowing money.
Even with no income, individuals still need to spend some money to survive.
It should come as no surprise that the average propensity to consume is lower at higher levels
of disposable income and the average propensity to save is greater at higher levels of income.
It should be quite logical that an individual will be able to save more as they earn higher
amounts of disposable income.
Also note that the values of the APC and APS should always be equal to 1.
You can always double check your work this way.
The APC can be greater than 1, but then the APS value will have to be negative.
This next problem is a bit more complicated.
Once again, I’ll give you some basic information and you’ll need to calculate the values
for two propensities.
This time we’re looking at the marginal propensity to consume and save.
This information is slightly different from the previous table so pause the video now
and try to complete the problem.
I’ll share my pathway to the answers in the following part of the video.
I find it helpful to include information on the change in consumption.
This is calculated by subtracting the previous amount of consumption from the current level
of consumption.
At a disposable income of $20,000 the individual consumes $17,000 total.
At the previous level of $10,000 they were consuming $9,500.
This represents a change in consumption of $7,500.
If you follow this same approach throughout the column your answers should match what
I have here.
Let’s add in the change in savings column.
The change in savings is calculated by subtracted the previous level of savings from the current
level of savings.
Let’s look again at the $20,000 level of disposable income.
At $10,000 the individual was saving only $500 and now at $20,000 they are saving $3,000.
This is a difference of $2,500 which indicates that a $10,000 increase in disposable income
to $20,000 results in an increase in savings of $2,500.
Again, use this approach to fill out the column.
In the next slide I’ll share the final values of the MPC and MPS.
Hopefully your calculations look like this.
Take a moment to pause the video and check your work.
The MPC is calculated by dividing the change in consumption by the change in disposable
income.
Similarly for the MPS, we divide the change in savings by the change in disposable income.
To check our work, we can also add the MPC and MPS which should always add up to 1.
You’ll notice that as disposable income increases, so does savings.
It was mentioned earlier in the video that as an individual’s income rises, so does
their ability and propensity to save.
This is displayed here by the increase in the marginal propensity to save as income
reaches $60,000.
By now you should have a good understanding of these key terms and their calculations.
The practice should deepen your understanding and if you had any problems or you need some
help, leave a question or comment and let’s try and answer it together.
That’s us done for now and I will see you in the next one!