Aggregate Demand, Consumption and Saving — Part 2: Propensities to Consume and Save: visual lesson, ISC Class 12 Economics

Lesson

Propensities to Consume and Save

Part 2 — the consumption function, APC and MPC, the saving function, APS and MPS, and two identities.

In this lesson you will

Calculate APC and MPC from income and consumption data and explain why the MPC lies between 0 and 1
Describe the consumption function and its curve, including the break-even income
Derive a saving schedule and use APC + APS = 1 and MPC + MPS = 1 to find unknown values

Part 2 at a glance

Concept

Average propensities compare totals; marginal propensities compare changes.

Table of the four propensities: average propensity to consume is consumption over income; marginal propensity to consume is change in consumption over change in income; average propensity to save is saving over income; marginal propensity to save is change in saving over change in income
Ratio	Formula	Meaning
APC	C ÷ Y	Share of income consumed
MPC	ΔC ÷ ΔY	Share of extra income consumed
APS	S ÷ Y	Share of income saved
MPS	ΔS ÷ ΔY	Share of extra income saved

Diagram

Imagined figures, ₹ crore: autonomous consumption 90, slope (MPC) 0.7, break-even income 300.

C = c̄ + bY. In imagined Neelgiri Pradesh, C = 90 + 0.7Y (₹ crore): 90 is autonomous consumption and 0.7 is the MPC.