Marginal Propensity to Consume (MPC)

Marginal Propensity to Consume (MPC) shows what percentage of additional income a consumer utilizes towards consumption.

Scenario: Johnny gets a raise, and his income rises by $100. He spends $80 of his additional income. What's his marginal propensity to consume?

MPC = Change in Consumption / Change in Income

Change in Consumption = $80
Change in Income = $100

MPC = $80 / $100
MPC = 0.80

Answer: For each additional dollar of income Johnny earns, he will spend $0.80 (or 80%) of it towards consumption.

In consumption formulas...

Scenario: Given Country ABC's economy has a consumption schedule of C = 20 + 0.75(Y), what's the marginal propensity to consume?

C represents the total consumption in the economy.
Y represents the total income of that economy.

C = 20 + 0.75(Y)

Notice we're multiplying 0.75 against our income (Y)! Therefore...

Answer: Since 0.75 (or 75%) of our income (Y) goes towards consumption (C), this means our MPC is 0.75.

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