The average propensity to consume is a key indicator used in macroeconomics to describe how much income households, firms, and governments allocate towards consumption. It measures the percentage of each additional dollar earned that people spend on consumer goods and services.

What is the average propensity to consume (APC)?

The average propensity to consume is the ratio of consumption to income.

The APC is the slope of the consumption function, which means that it can be used to determine how much additional income will be spent on consumption.

This is because when an individual’s income increases, their effective marginal tax rate decreases as well.

How to calculate the average propensity to consume? Average propensity to consume formula

The average propensity to consume refers to the fraction of each additional dollar of income that is spent. It represents the fraction of new income that is consumed.

\text {APC} = \frac {\text {Total consumption}}{\text {Total disposable income}}

In this equation, C represents consumption, and Y stands for income. The greater APC is, the more elastic consumer spending with respect to income; thus it follows that if APC increases then there will be an increase in total saving as well as an investment because consumers will spend less and save more of their incomes. On the other hand, if APC decreases then there will be a decrease in total savings as well as investment because consumers will spend more and save less of their incomes.

What is the difference between average and marginal propensity to consume?

The average propensity to consume (APC) is the average percentage of disposable income that is spent on consumption. It’s the portion of our income that we spend on goods and services.

Sometimes you will hear it referred to as “consumption.” This can be confusing because economists also use the term “consumption” when they’re talking about what people purchase from businesses, like computers or food. In this case, though, economists are talking about what consumers buy for themselves (which could include items like computers).

The marginal propensity to consume (MPC) indicates how much more a consumer will spend if their disposable income increases by one dollar. For example: If I have $7 in my checking account, then if I get paid another $1 tomorrow morning I would probably spend all $8 right away because I wouldn’t really save any money at all ($0 savings)!

FAQ

How do you calculate average propensity?

APS is calculated by dividing total savings by income level.

Why does APC differ from MPC?

MPC measures the effect of change in income on change in consumption, whereas APC measures the effect of the total level of income on the total level of consumption.

Can the value of APC be greater than 1?

APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all levels of income which can be more than one as long as consumption is more than national income.