Average propensity to consume
Also called: APC · Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 12, Ch 4 "Determination of Income and Employment"
Meaning
The average propensity to consume (APC) is the share of total income that is spent on consumption. APC = C/Y. APC and the average propensity to save always add up to one: APC + APS = 1, because C + S = Y. When there is positive autonomous consumption, APC is greater than MPC and APC falls as income rises. At very low incomes APC can be more than 1. This means people are dissaving, that is, spending more than they earn.
Example
Take C = 100 + 0.8Y. At Y = 1,000, C = 900, so APC = 0.90. At Y = 2,000, C = 1,700, so APC = 0.85. APC falls even though MPC stays at 0.8.
Don't confuse with
- Marginal propensity to consume (MPC): MPC = ΔC/ΔY is the share of extra income that is consumed. It can never be more than 1. APC can be more than 1 at low income.
Related concepts
- Consumption function
- Autonomous consumption
- Induced consumption
- Marginal propensity to consume
- Marginal propensity to save
- Average propensity to save
- Savings