Marginal propensity to consume

Also called: MPC · Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 12, Ch 4 "Determination of Income and Employment"

Meaning

Marginal propensity to consume (MPC) is the change in consumption for each one-unit change in income: MPC = ΔC/ΔY = c, and 0 ≤ MPC ≤ 1 (NCERT includes both end points). It shows how much of each extra rupee of income people spend. This matters because MPC sets the size of the investment multiplier, 1/(1 − c). So it decides how strongly total income responds to new spending.

Explanation

Where MPC sits in the consumption function

• J.M. Keynes gave this idea in The General Theory (1936), written during the Great Depression. His point was that output depends on aggregate demand (the total spending planned in the economy). Consumption is the largest part of that demand.
• Consumption function: C = C̄ + cY
• C̄ (autonomous consumption): spending that does not depend on income. People spend it even at zero income, by dissaving (using up past savings) or borrowing.
• cY (induced consumption): spending that rises with income.

• c is the MPC.

• On a graph (income on the horizontal axis, consumption on the vertical axis):

• The line starts at C̄, above the origin.
• Its slope = c = tan α.

• Since 0 < c < 1, the line is flatter than the 45° line.

• MPC stays constant along a straight-line consumption function.

Range of MPC: what each value means

Value	Meaning
MPC = 0	Consumption does not change when income changes
0 < MPC < 1	The usual case: part of the extra income is spent and the rest is saved
MPC = 1	The whole of the extra income is spent

• MPC can never be more than 1. The change in consumption (ΔC) cannot be larger than the change in income (ΔY).
• Any extra spending beyond the extra income would have to come from past savings or loans.
• That spending is not part of the marginal response to income.

Worked example: Imagenia (C = 100 + 0.8Y)

• Autonomous consumption = ₹100. This is consumption at Y = 0.
• MPC = 0.8
• Income rises by ₹100, so consumption rises by 0.8 × 100 = ₹80.

• The other ₹20 is saved, so MPS (marginal propensity to save) = 0.2.

• Check with two income levels:

• Y = 1,000 → C = 900
• Y = 1,100 → C = 980

• ΔC/ΔY = 80/100 = 0.8 ✔

• Break-even income (the level where C = Y and saving is zero):

• 100 + 0.8Y = Y → Y = ₹500

• Multiplier = 1/(1 − 0.8) = 5

• So ₹100 of new investment finally raises income by ₹500.

What makes MPC high or low

• Income level: poorer households have a higher MPC. They spend most of any extra rupee on basic needs. Richer households save more of it.
• Taxes: with a government, consumption depends on disposable income (Yd = Y − T, plus transfers), the income people actually have in hand after taxes and transfers.
• So C = C̄ + c(Y − T).
• Imagenia, Y = 1,000: with T = 0, C = 900. With T = 100, C = 820.

• A ₹100 tax cuts consumption by only ₹80 (= c × ΔT). Households also save ₹20 less.

• Fear and crises: the consumption function can shift down, as in the COVID-19 lockdown (see below).

In India

• How India measures consumption: India does not publish MPC as a figure. The national-accounts measure of household spending is private final consumption expenditure (PFCE).
• PFCE covers spending on final goods and services by resident households and non-profit institutions serving households (NPISH). Households and NPISH are estimated together [7].
• It includes the imputed rent of owner-occupied dwellings (the rent people "pay themselves" for living in their own house) and home-grown produce that people consume themselves [7].
• It is estimated by the commodity flow approach. This starts from the total supply of each good, then subtracts its other uses [7].

• MoSPI's National Accounts Statistics – 2025, released on 16 May 2025, gives consumption and saving estimates for households, the corporate sector and the government, with base year 2011-12 [8].

• Size of consumption:

• PFCE was 61.0% of GDP in 2021-22 and 60.9% in 2022-23 at current prices [4][5]. So about ₹6 of every ₹10 of GDP is private consumption.
• It was 55.8% of GDP in 2005-06 [9].

• PFCE growth was estimated at 7.6% in 2024-25, up from 5.6% in 2023-24 [6].

• The saving side (the other part of each rupee):

• Households provided 60.9% of India's gross savings in 2022-23. The general government share was (−) 7.5%, which means it dissaved [4][5].

• COVID-19 example of the consumption function shifting:

• Household financial savings spiked in Q1 of 2020-21, against the usual seasonal pattern. The likely reason was forced saving: people could not spend on non-essentials during the lockdown [3].
• The rate then eased to 8.2% of GDP in Q3 of 2020-21 [2].

Don't confuse with

• Average propensity to consume (APC = C/Y): consumption per unit of total income, while MPC works on the change in income. APC can exceed 1 at low income, when people dissave (Imagenia: 1.20 at Y = 250). MPC can never exceed 1. With a positive C̄, APC > MPC at every income level, and APC falls towards MPC as income rises.
• Marginal propensity to save (MPS = ΔS/ΔY): the part of extra income that is saved. MPS = 1 − MPC, so MPC + MPS = 1. Both lie between 0 and 1. MPS can never be negative, although APS can be.
• Autonomous consumption (C̄): the intercept of the consumption function, which does not depend on income. MPC is the slope.
• PFCE: a measured amount of spending in national accounts. MPC is a theoretical ratio of changes.

Prelims Hooks

• MPC = ΔC/ΔY = c, the slope of C = C̄ + cY (slope = tan α). NCERT range: 0 ≤ MPC ≤ 1, with both end points included.
• Trap: APC > 1 is possible (dissaving at low income), but MPC > 1 is not. APS can be negative, but MPS cannot.
• MPC + MPS = 1 and APC + APS = 1. Both follow from Y = C + S.
• Investment multiplier = 1/(1 − MPC) = 1/MPS. Higher MPC gives a bigger multiplier (MPC 0.8 → multiplier 5).
• On a straight-line consumption function, MPC is constant while APC falls as income rises.
• A tax of ΔT cuts consumption by c × ΔT, not the full ΔT, because C = C̄ + c(Y − T).

Mains Points

• Targeted transfers give more demand per rupee:
• Poorer households have a higher MPC. With MPC 0.9, a ₹1,000 transfer means ₹900 of spending. With MPC 0.5, it means only ₹500.
• A higher c also means a bigger multiplier, 1/(1 − c).

• So in a slowdown, cash transfers to the poor lift demand more than tax cuts for high earners.

• Quality of fiscal stimulus (GS-III):

• A tax cut raises consumption by only c × ΔT, because households save part of it.
• A rupee of direct government spending enters demand in full in the first round.

• The COVID-19 forced-saving spike in 2020-21 [2][3] shows that private consumption can fall suddenly. This supports counter-cyclical fiscal policy, where the government spends more in bad times.

• Balancing consumption and saving:

• A high MPC supports demand. But households provide 60.9% of India's gross savings (2022-23), and this money finances investment [4][5].
• Pushing consumption too hard can shrink that pool.
• Too much saving in a slump shrinks demand instead. This is Keynes's paradox of thrift.
• Policy has to balance the two.

Related concepts

• Consumption function
• Autonomous consumption
• Induced consumption
• Marginal propensity to save
• Average propensity to consume
• Average propensity to save
• Savings

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