Posted in Finance, Accounting and Economics Terms, Total Reads: 763
Definition: Marginal Propensity to Consume(MPC)
Propensity to consume is the proportion of the disposable amount which individual desire to spend. MPC (Marginal Propensity to Consume) is the proportion of additional income one wants to spend as opposed to being saved.
Example: Let’s say that your monthly salary has been increased by Rs 10000 after your excellent performance. If you decide to spend Rs 8000, then MPC in 0.8 (8000/10000=0.8)
MPC is an important part of Keynesian model of economics.
If we know the marginal propensity to consume, we can calculate how much the individual is likely to spend. Higher the disposable income, higher is the chances of consumption. This additional spending on consumption generates additional production. This additional production in turn leads to generation of additional income thus forming a circle. Thus, higher the production, higher the income, which then leads to higher consumption and back to again higher production.