Marginal Propensity to Consume

The marginal propensity to consume, or MPC, is the fraction of additional disposable income that people spend rather than save. It's calculated by dividing the change in consumption by the change in disposable income.

For instance, if Kevin’s disposable income increases by $100 and he spends $80 more, his MPC is 0.8. This means he spends 80 cents of every extra dollar he earns.

MPC always falls between 0 and 1. An MPC of 1 means all additional disposable income is spent, while an MPC of 0 means all of it is saved.

In the linear consumption function, the letter “b” represents the slope of the function, or the MPC. A higher MPC results in a steeper consumption curve. With a higher slope value, spending increases more rapidly as disposable income grows.

In real life, the MPC varies across income groups. Lower-income households typically have a higher MPC because they spend more of what they earn to meet essential needs.

Governments use MPC to shape fiscal policy. Directing funds to people with high MPC boosts short-run demand, since they’re more likely to spend the extra money.