Marginal Propensity to Consume
The fraction of an extra dollar of income that is spent rather than saved.
Formula
Variables
Example
Spend $80 of an extra $100: MPC = 0.8
How it works
Marginal propensity to consume measures how much of a change in income is turned into extra spending. It works by comparing the increase in consumption to the increase in income, so if income rises by a certain amount and household spending rises by part of that amount, the ratio tells you the share that is consumed. A higher MPC means people tend to spend new income quickly, while a lower MPC means more of it is saved or used to pay down debt.
When to use it
Use this when analyzing household spending behavior, especially after a tax cut, wage increase, or stimulus payment. It is also useful in macroeconomics when studying how changes in income affect aggregate demand and the size of the fiscal multiplier.
Worked example, step by step
A household's monthly income increases from $3,500 to $3,900. Change in income: ΔY = $3,900 - $3,500 = $400 Their monthly consumption increases from $2,800 to $3,080. Change in consumption: ΔC = $3,080 - $2,800 = $280 Apply the formula: MPC = ΔC / ΔY = 280 / 400 MPC = 0.7 Interpretation: the household spends 70% of each extra dollar of income and saves the remaining 30%.
Common mistakes to avoid
- Using total consumption instead of the change in consumption
- Dividing change in income by change in consumption instead of the other way around
- Forgetting that MPC is usually based on changes over the same time period
Did You Know?
A higher MPC makes fiscal stimulus more powerful, because each dollar recirculates further through the economy.
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