The ultimate propensity to consume and save. Propensity to consume extreme - the formula

With increasing income, any person begins to spend more and save for something. It would seem that in practice everything is quite simple - more money, which means more than anything else. In fact, the economy has a number of concepts, theories, various formulas and relationships that describe, calculate and explain this phenomenon. These include the propensity to consume (limit, average), to savings, Keynesian basic psychological law, etc. Knowledge and understanding of these economic terms and laws makes it possible to differently assess the usual phenomena, as well as the causes of their occurrence and patterns, to Which they lead.

The founder

The notion of "marginal propensity to consume and save" appeared in the 20-30s. The last century. His economic theory was introduced by the Englishman John Maynard Keynes. By consumption, he meant the use of various goods to meet the physical, spiritual or individual needs of one person or group of individuals. Savings Keynes also indicated that part of the income that was not spent on consumption, but was saved in order to be used in the future with greater benefit. The economist also revealed the basic psychological law according to which the amount of consumption inevitably grows with income growth (the range of benefits is expanding, cheap goods are replaced by more expensive ones, etc.), but not so quickly (not proportionally). In other words, the more a person or group of people gets, the more they spend, but also the greater amount they have left for savings. Based on his theory, Keynes developed such concepts as the average and marginal propensity to consume (the formula for calculating it was also derived), as well as the average and marginal propensity to save and the methodology for calculating it. In addition, this outstanding economist has identified and established a number of interrelations between these concepts.

Calculation of consumption

The marginal propensity to consume is the ratio of the change in consumption to the changes in income. It represents the share of changes in consumer spending per unit of income that led to them. Denote this concept usually in Latin letters MPC - short for English marginal propensity to consume. The formula looks like this:

MPC = Changes in consumption / income change.

Calculation of savings

As well as the propensity to consume, the marginal propensity to save is calculated by the ratio of changes in savings to changes in income. It expresses the share of changes in savings that account for each monetary unit of additional income. In the literature this concept is denoted by MPS - an abbreviation from English marginal propensity to saving. The formula in this case is:

MPS = Changes in savings / income changes.

Example

Calculations of such indicators as the propensity to consume marginal or saving, are fairly simple.

Initial data: consumption of the Ivanov family in October 2016 was 30,000 rubles, and in November - 35,000 rubles. Incomes received in October 2016, the year is equal to 40,000 rubles, and in November - 60,000 rubles.

Savings 1 = 40 000 - 30 000 = 10 000 rubles.

Savings 2 = 60 000 - 35 000 = 25 000 rubles.

MPC = 35,000 -30,000 / 60,000 - 40,000 = 0.25.

MPS = 25,000 - 10,000 / 60,000 - 40,000 = 0.75.

Thus, for the Ivanov family:

The marginal propensity to consume is 0.25.

The marginal propensity to save is 0.75.

Interrelationships and dependencies

The marginal propensity to consume and save per one monetary unit with the same initial data should total one. It follows that none of these values as a result of calculations can not be greater than 1. Otherwise, you need to look for errors or inaccuracies in the source data.

In addition, in addition to revenues, these factors can be affected by other factors:

• Wealth accumulated by households (securities, real estate). The larger their value, the lower the savings level and the higher the consumption index. This is due to the costs of maintaining the property, and maintaining a certain standard of living, and the lack of an urgent need for savings.
• The growth of a variety of taxes and fees can significantly reduce both the amount of savings and the amount of spending.
• The increase in supply in the market contributes to the growth of consumption and, accordingly, to a decrease in the level of accumulation. Especially acute is the emergence of a new product or service (as a result of scientific and technological progress), as there is a new need, which previously was not.
• Economic expectations can trigger the growth of both one indicator and the other. For example, waiting for the rise in price of a product can trigger its excessive consumption (harvesting for the future), which will have a negative impact on savings.
• Unforeseen significant price increases will affect differently the consumption and savings of different social groups.

Features of the analysis

There are several points that should be taken into account when analyzing such indicators as the propensity to consume marginal, and also to saving. What are these moments? First, if the marginal propensity to consume is almost unity, then there is a lack of income or a low level of its growth in comparison with the growth of physical and spiritual needs. Most often, such a picture develops in developing countries with an unstable economy or during periods of financial and economic crises.

Secondly, the calculation of these indicators for individuals or families for the economy of the country or the industry is not very informative, so most often they consider a certain set of consumption and savings (households, social groups, etc.). In doing so, use a number of provisions of Keynesian theory. For example, consumption is a function of disposable income.

Thirdly, the indicators usually use indicators of not two periods (as indicated in the calculation example), but values of longer periods of time. Then the results are displayed graphically, which makes it possible to more clearly study and analyze the dynamics. The constructed graphs bear the names of Keynesian functions and often appear in the analysis of various economic phenomena.