Q. 14.3( 3 Votes )

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Answer :

Marginal propensity to consume – It is the proportion of additional income going to consumption expenditure. It is the ratio between change in consumption and change in income.

Marginal propensity to save – It is the proportion of additional income that goes to saving. It is the ratio between change in savings and change in income

Propensity to consume means desire to consume so marginal propensity to consume is the ratio of increase in consumption due to increase in income. In the same way propensity to save means desire to save, so marginal propensity to save means the ratio of increase in saving due to increase in income.

Relation between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)

MPC = ∆C/∆Y

MPS = ∆S/∆Y

Where

∆C = Change in Consumption

∆Y = Change in Income

∆S = Change in Saving

MPC + MPS = 1

Y = C + S

∆Y = ∆C + ∆S

Dividing both sides by ∆Y

∆Y/∆Y = ∆C/∆Y + ∆S/∆Y

1 = MPC + MPS

Ø MPC = 1 – MPS, OR

Ø MPS = 1 – MPC

Example - Suppose the income increases from 200 crores to 250 crores and consumtion increses from 20 crores to 40 crores.

∆Y = 50 crores

∆C = 20 crores

MPC = 20/50 = 40%

MPS = 1 – 40% = 60%

This means that if 40% of change in income is going into consumption then the remaining 60% will go to saving.

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