Marginal Propensity to Consume (MPC)

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Formula: MPC = ΔC / ΔY

The Marginal Propensity to Consume (MPC) is a metric that shows the proportion of additional income that an individual spends on consumption. In this formula, MPC represents the Marginal Propensity to Consume, ΔC (changeInConsumption) is the change in consumption expenditures, and ΔY (changeInIncome) is the change in disposable income. It is a dimensionless number.

MPC is used in Keynesian economics to measure the responsiveness of consumption spending to a change in income. If MPC is high, it indicates that consumers are more likely to spend additional income rather than save it. Knowing the MPC helps economists predict the impact of fiscal policy on the economy. For instance, during a recession, a government might implement a tax cut or stimulus spending, anticipating that a higher MPC will lead to an increase in consumption and, thus, an increase in economic activity.

Tags: Economics, Consumption, Income, Macroeconomics