CONSUMPTION

The amount of money that people spend out of national income on the purchase of goods and services for the direct satisfaction of their wants is called aggregate consumption expenditure or consumption. Consumption expenditure depends on several factors like income, price level etc. but income influences consumption the most.

Consumption Function
Consumption function relates to the mutual relationship between aggregate consumption expenditure and national income. Consumption is function of income.
C = f(Y)
Where, C = Consumption
               f = function
               Y = Income


PROPENSITY TO CONSUME

Propensity to consume is the ratio of consumption to income at different level of income. A schedule showing the various amounts of consumption which correspond to different levels of income is called as the propensity to consume. Propensity to consume is of two kinds:

1)      Average Propensity to Consume (APC) – The average propensity to consume is the ratio of consumption expenditure to any particular level of income.
Average Propensity to Consume = Consumption / Income

2)      Marginal Propensity to Consume (MPC) – Marginal propensity to consume is the ratio of a change in consumption to a change in income.
Marginal Propensity to Consume = Change in Consumption / Change in income



                                                   PROPENSITY TO SAVE

Propensity to save is the ratio of saving to income at different level of income. A schedule showing the amounts that will be saved at different level of income. Propensity to save is of two kinds:
1)      Average Propensity to Save (APS) – The average propensity to save is the ratio of saving to income.
Average Propensity to Save = Saving / Income

2)      Marginal Propensity to Save (MPS) – The marginal propensity to save is the ratio of change in saving to a change in income.
Marginal Propensity to save = Change in saving / Change in Income



Relation between APC and APS

APC = C / Y  and  APS = S / Y

Y = C + S

APC + APS = C / Y + S / Y

APC + APS = Y / Y = 1

APC + APS = 1

APC = 1 - APS   or  APS = 1 - APC


Relation between MPC and MPS

 MPC + MPS = 1

MPC = 1 – MPS    or MPS = 1 - MPC


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