Glossary term
Marginal Propensity to Consume (MPC): Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The marginal propensity to consume (MPC) is the fraction of each additional unit of income that households spend on consumption. It equals the change in consumption divided by the change in income, and lies between zero and one. The remainder, the marginal propensity to save, is saved.
In more detail
MPC differs from the average propensity to consume, which is total consumption divided by total income. Poorer households usually spend a larger share of extra income than richer ones, so transfers to them raise demand more. The MPC fixes the size of the multiplier: with an MPC of 0.8 the multiplier is 1 ÷ (1 − 0.8) = 5.
Example
If a household’s income rises by ₹1,000 and its consumption rises by ₹800, its MPC is 800 ÷ 1,000 = 0.8 and its marginal propensity to save is 0.2.
Key points
- MPC = ΔC ÷ ΔY.
- MPC + MPS = 1.
- A larger MPC means a larger multiplier.
Common mistake
Mixing up MPC with the average propensity to consume.
Related terms
Where it is explained
This term is explained in Class 12 Macroeconomics Chapter 4: Income Determination.