Marginal propensity to consume

Definition

The marginal propensity to consume (denoted MPC) for an individual or household is a dimensionless quantity that measures the fraction of an additional unit of disposable income (i.e., the residual income after taxes and transfers) that is spent on additional consumption. Note that the marginal propensity to consume may not be a constant but may itself vary based on the level of disposable income.

The marginal propensity to consume is a measure of induced consumption -- the component of consumption that is induced by changes in one's disposable income. This is in contrast with autonomous consumption (also called exogenous consumption) which is the component of consumption that is relatively unaffected by income levels and is undertaken even when income levels are close to zero.

Differential definition

This definition measures the marginal propensity to consume at a given level of disposable income, and is defined as the derivative of consumption with respect to disposable income. If $Y$ denotes disposable income and $C$ denotes the total money spent on consumption, the marginal propensity to consume is given by:

$M P C = \frac{d C}{d Y}$

Note that the value may not be a constant but may depend on the level of $Y$ .

Interval definition

This definition measures the marginal propensity to consume between two levels of disposable income, and is defined as the difference quotient of consumption with respect to disposable income. If the consumption level is $C_{1}$ for a disposable income of $Y_{1}$ and is $C_{2}$ for a disposable income of $Y_{2}$ , the marginal propensity to consume is given by:

$M P C = \frac{C_{2} - C_{1}}{Y_{2} - Y_{1}}$

The two definitions are related in that the derivative is a limit of a difference quotient, so as $Y_{2} \to Y_{1}$ , we obtain the marginal propensity to consume at $Y_{1}$ .

Related notions

Marginal propensity to save, denoted MPS, is defined as $1 - M P C$ , and is the fraction of additional disposable income allocated to additional savings.

Short run versus long run

Some part of consumption decisions is made based on the (estimate of) long run disposable income, also called permanent income. Other consumption decisions are made based on short run disposable income. It is possible to conceptually distinguish the marginal propensity to consume based on permanent income from the marginal propensity to consume based on short run income.