Question

Explain the relationship between average propensity to consume and average propensity to save. Which of these can have a negative value and when?

Answer 1

APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. APC = consumption / income = C/Y.

APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income. APS= savings/ income= S/Y.

Therefore, APC+ APS

=C/Y+S/Y

=C+S/Y

= Y/Y

= 1

Hence, APC+APS= 1.

APS can be less than zero at income levels which are lower than the break-even point.