Propensity to consume or consumption function expresses the function relationship between total consumption and total income. It refers to the consumption expenditure at various levels of income. Symbolically it is expressed as C=f(y). The consumption function has two technical attributes or properties (a) Average propensity to consume are (b) marginal propensity consume. Average propensity to consume and Marginal propensity to consume.
The concept of APC indicates the ratio of aggregate consumption expenditures to aggregate income, or in other words it is the ratio of absolute consumption to absolute income i.e. it is the ratio of C to Y and is expressed as C/Y. Thus it is found dividing consumption expenditure by income.
For example at income 400 crores the consumption expenditure is Rs. 360 crores, the APC=C/Y=360/400 - 9/10 = 0.9. The APC at various income levels is shown in the table given below. The APC declines income increases because the proportion of income spent consumption decrease.
Diagram ability APC indicates a single poi on the consumption curve. In the figure 1 APC at income le OY, is measured by the point 'A' APC at point A = OC/OY The CC1Curve measures the average propensity to consume. APC curve shown the declining tendency.
The concept marginal propensity to consume (MPC) refers the ratio of small change in consumption to small change in income. It is found by dividing change in consumption by change income, or MPC= AC/AY. It is defined as the rate of change in assumption upon the change in income or as the rate of change in the average propensity at income changes.
Thus MPC be found out by dividing an increment in consumption by an increment in income. For example it income increases from 400 500 crores, and consumption expenditure increases from 300 2s to 350 cores, then MPC= AC/AY= 50/100=0.5.
Diagrammatically the marginal propensity to consume is measured he slope of the consumption curve. In the fig. x-2 the marginal propensity to consume between point A and B is measured as =AC/AY=C1C2/Y1Y2 or BD/AD.
MPC is greater than zero but less than one.
The value of MPC always greater than zero because Option expenditure must increase with the increase in income, less than one, because the total increase in income is not consumed a part of it is saved. Thus this characteristic can be symbolically stated as 0<MPC<I where MPC is always positive but less than one
(b) MPC falls with the fall in income:-
As the communities grow richer, it tends to consume smaller percentage of each increment to its income. Because of this tendency as it moves from left to right.
(c) The short run MPC is stable:
Because of the psychological and institutional factors on which the propensity to consume depends do not change in the short period.
Relation between APC and MPC
APC and MPC are closely related to each other.
(1) APC refers to the ratio of absolute consumption absolute income at a particular point of time. On the other hand MP represents the ratio of change in consumption to change in income; MPC is the rate of change in APC.
(2) As income rises both APC and MPC declines, but I lie decline in MPC is more than the decline in APC, as income falls both APC and MPC rises but APC rises at a slower, rate than MPC.
(3) MPC is useful in short-period where as APC is useful in long period. In the short period there is no change in MPC and MPC<APC. In the long period APC=MPC.