Question

What is the difference between marginal propensity to consume and marginal propensity to save? What is the relation between the two?

Answer 1

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and the corresponding change in consumption.

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPC+MPS

= ^C/^Y+ ^S/^Y

=^C+^S/ ^Y

=^Y/^Y

=1

Hence, MPC+MPS=1.