The full form of MPC is Marginal Propensity to Consume.
Understanding Marginal Propensity to Consume (MPC)
MPC is a fundamental concept in economics that explains the relationship between changes in income and consumption.
Definition
Marginal Propensity to Consume (MPC) refers to the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
Calculation
According to the provided reference, the MPC is calculated as:
MPC = Change in Consumption / Change in Disposable Income
Example
For instance, if a person's disposable income increases by $100, and they spend $75 of that increase, their MPC is 0.75 (75/100). This means that for every additional dollar of income, they will spend 75 cents and save 25 cents.
Significance of MPC
- Economic Indicator: MPC is a key indicator used to assess the potential impact of government policies and economic changes on overall consumption and economic activity.
- Multiplier Effect: It plays a crucial role in the multiplier effect, where an initial increase in spending leads to a larger overall increase in economic output.
- Forecasting: Economists use MPC to forecast consumer spending patterns based on income changes.
