Q.What is marginal propensity to consume? How is it related to marginal propensity to save?

Marginal propensity to consume (MPC) is the proportion of an additional unit of income that a household spends on consumption. It measures the change in consumption expenditure resulting from a change in income, expressed as:

where $\Delta C$ is the change in consumption and $\Delta Y$ is the change in income.

Marginal propensity to save (MPS) is the proportion of an additional unit of income that a household saves. It is defined as:

Since any additional income is either consumed or saved, the sum of MPC and MPS must equal unity:

This relationship follows from the fact that $\Delta Y = \Delta C + \Delta S$. Dividing both sides by $\Delta Y$ gives $1 = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y}$, which is the identity above. Both MPC and MPS lie between 0 and 1, and they are complementary measures of how households allocate incremental income.

The Core Idea: What Happens to Extra Income?

When a household receives an additional rupee of income—perhaps from a bonus, a wage increase, or a government transfer—it faces a choice: consume it now or save it for the future. The marginal propensity to consume captures the consumption half of this decision. It tells us what fraction of that extra income flows immediately into spending on goods and services.

Formally, MPC is the ratio of the change in consumption to the change in income:

where $\Delta C$ is the change in consumption and $\Delta Y$ is the change in income.

If a household's income rises by ₹100 and consumption rises by ₹80, the MPC is $0.8$ or $80\%$. This means 80 paise of every additional rupee earned is spent, while the remaining 20 paise is saved.

Why MPC Matters

The marginal propensity to consume is central to understanding the multiplier effect in macroeconomics. When the government injects spending into the economy—say, through infrastructure projects—the initial recipients spend a fraction (the MPC) of that income, which becomes income for others, who in turn spend a fraction of that, and so on. A higher MPC means each round of spending is larger, amplifying the total impact on national income.

MPC also varies across income groups. Poorer households typically have a higher MPC because they spend most of any extra income on necessities. Wealthier households, already meeting their needs, tend to save a larger share, so their MPC is lower. This insight shapes policy: transfers to lower-income groups generate more immediate demand than tax cuts for the rich.

The Relationship with Marginal Propensity to Save

Every rupee of additional income must go somewhere—it is either consumed or saved. There is no third option. This accounting identity gives us the fundamental relationship between MPC and the marginal propensity to save (MPS):

The marginal propensity to save is defined symmetrically:

where $\Delta S$ is the change in saving.

Since $\Delta Y = \Delta C + \Delta S$ (income is either consumed or saved), dividing through by $\Delta Y$ yields:

If you know one propensity, you immediately know the other. An MPC of $0.75$ implies an MPS of $0.25$; an MPS of $0.1$ implies an MPC of $0.9$. The two are mirror images, always summing to unity because they partition the same flow of extra income.