Marginal Propensity to Save or MPS is a concept propounded in Keynesian macroeconomic theory, which refers to the proportion of any additional income that is saved by a consumer rather than utilising it for spending on consumption of goods and services.
In other words, it shows how much an individual is willing to save when he receives some additional income. For example, if we say MPS is 2%, then the individual is willing to save 2 rupees for every 100 rupees earned by him.
MPS is represented by a savings line which is a sloped line that is created by putting change in savings on the y-axis (vertical) and change in income on the x-axis (horizontal)
Importance of MPS
In Keynesian economics, MPS is used to determine the relationship between savings and changes in income.
It shows the important aspects that are associated with expenditure habits in a household because savings and consumption are dependent on each other. It is considered that a higher income would lead to higher MPS.
MPS also has an important role in determination of the multiplier effect. The multiplier effect deals with any change in the market value of goods that are produced inside the borders of a country, which can occur due to a change in an autonomous variable such as increased government expenditure.
Any change in government expenditure will lead to an increase in disposable income that will lead to increased consumption. The increased consumption will result in an increase in disposable income for other sectors, which leads to further consumption.
MPS is calculated using the following formula
MPS = Change in Savings (ΔS) / Change in Disposable Income (ΔY)
This concludes our article on the topic of Marginal Propensity to Save, which is an important topic in Economics for Commerce students. For more such interesting articles, stay tuned to BYJU’S.