# Understanding Marginal Propensity to Consume (MPC) in Economics

## What Is Marginal Propensity to Consume (MPC)?

In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.

MPC is shown by a [consumption](https://www.investopedia.com/terms/c/consumptionfunction.asp) line consumption line, a sloped line that plots changes in consumption on the vertical "y" axis and changes in income on the horizontal "x" axis.

### Key Takeaways

*   Marginal propensity to consume (MPC) is the fraction of additional income that a consumer spends rather than saves.
*   MPC is a component of Keynesian economics and impacts the multiplier effect in economic growth.
*   People with higher incomes tend to have a lower MPC because their basic consumption needs are likely satisfied.
*   Higher MPC means increased spending and less saving, leading to more production and economic growth.
*   Calculating MPC helps economists understand how income changes affect consumer spending and saving behavior.  
    

![Marginal Propensity to Consume (MPC)](https://www.investopedia.com/thmb/7rV3r37G4ejW8l118wOu6s_EnKo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Marginal-propensity-to-consume-4193236-ecb7990f8dc2429692274122652df5d6.jpg)

*— Investopedia / Madelyn Goodnight*

## How to Calculate and Interpret Marginal Propensity to Consume (MPC)

MPC equals ΔC / ΔY, with ΔC as the change in consumption and ΔY as the change in income. If consumption rises by 80 cents with each extra dollar of income, then MPC is 0.8.  
  

![Marginal Propensity to Consume](https://www.investopedia.com/thmb/puEspudPcd0amo8CJuEmMxYM7wc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Marginal_Propensity_to_Consume2-4a4dffdca23d4462adb20e85e1f9770b.PNG)

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Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500).

The other side of the marginal propensity to consume is the [marginal propensity to save](https://www.investopedia.com/terms/m/marginal-propensity-save.asp), which shows how much a change in income affects saving levels. The calculation assumes that marginal propensity to consume + marginal propensity to save = 1. In the suit example, your marginal propensity to save will be 0.2 ($100 divided by $500).

If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500), and your [calculated marginal propensity to save](https://www.investopedia.com/ask/answers/061815/how-marginal-propensity-save-calculated.asp) will be 1 ($500 divided by 500).

## The Impact of Marginal Propensity to Consume on Economic Policy

Economists calculate households' MPC by income level using data on household income and spending. This calculation is important because MPC is not constant; it varies by income level.

Typically, as income rises, MPC drops because more needs and wants are satisfied, leading to more saving. At low-income levels, MPC tends to be much higher as most or all of the person's income must be devoted to subsistence consumption.

[Keynesian theory](https://www.investopedia.com/terms/k/keynesianeconomics.asp) suggests increased investment or government spending raises income, leading consumers to spend more. This extra spending boosts production, creating a cycle called the [Keynesian multiplier](https://www.investopedia.com/ask/answers/09/keynesian-multiplier.asp). The more additional income is spent rather than saved, the greater the effect.  

A higher MPC means a larger multiplier and greater consumption increase from investment. Economists use the MPC to estimate the total impact of income increases.

## What Is Marginal Propensity to Consume in Simple Terms?

The marginal propensity to consume measures the degree to which a consumer will spend or save in relation to an aggregate raise in pay. Or, to put it another way, if a person gets a boost in income, what percentage of this new income will they spend? Often, higher incomes express lower levels of marginal propensity to consume because consumption needs are satisfied, which allows for higher savings. By contrast, lower-income levels experience a higher marginal propensity to consume since a higher percentage of income may be directed to daily living expenses.

## How Do You Calculate Marginal Propensity to Consume?

To calculate the marginal propensity to consume, the change in consumption is divided by the change in income. For instance, if a person’s spending increases 90 cents more for each new dollar of earnings, it would be expressed as 0.9/1 = 0.9. On the other hand, consider a person who receives a bonus of $1,000 and spends $100 of this while saving $900. The marginal propensity to consume would equal $100/$1,000 or 0.1.

## What Role Does the Marginal Propensity to Consume Have in Economics?

In Keynesian macroeconomic theory, the marginal propensity to consume is a key variable in showing the multiplier effect of economic stimulus spending. Specifically, it suggests that a boost in government spending will increase consumer income, and in turn, consumer spending will rise. On a macro level, this investment boost increases overall demand.

## Key Insights on Marginal Propensity to Consume

MPC represents the portion of additional income spent rather than saved and highlight its significance in economic theory and policy. MPC varies across income levels. Lower-income groups typically exhibit higher MPC than higher-income groups due to the necessity of spending on subsistence.  
  
Actionable insights such as understanding one's MPC can inform personal financial decisions and help government policymakers in designing economic stimuli.

> **Article Sources**
>
> 1.  Brendan Sheehan. "[Understanding Keynes’ General Theory; Chapter 4, The Propensity to Consume and the Multiplier](https://www.google.com/books/edition/_/fz6BDAAAQBAJ?hl=en&gbpv=0)." Pages 66-72. Palgrave Macmillan, 2009.
>     
> 2.  Brendan Sheehan. "[Understanding Keynes’ General Theory; Chapter 4, The Propensity to Consume and the Multiplier](https://www.google.com/books/edition/_/fz6BDAAAQBAJ?hl=en&gbpv=0)." Page 67. Palgrave Macmillan, 2009.
>     
> 3.  Brendan Sheehan. "[Understanding Keynes’ General Theory; Chapter 4, The Propensity to Consume and the Multiplier](https://www.google.com/books/edition/_/fz6BDAAAQBAJ?hl=en&gbpv=0)." Pages 81-86. Palgrave Macmillan, 2009.
>     
> 4.  Brendan Sheehan. "[Understanding Keynes’ General Theory; Chapter 4, The Propensity to Consume and the Multiplier](https://www.google.com/books/edition/_/fz6BDAAAQBAJ?hl=en&gbpv=0)." Pages 66-81. Palgrave Macmillan, 2009.
>     
> 5.  Brendan Sheehan. "[Understanding Keynes’ General Theory; Chapter 4, The Propensity to Consume and the Multiplier](https://www.google.com/books/edition/_/fz6BDAAAQBAJ?hl=en&gbpv=0)." Pages 66-86. Palgrave Macmillan, 2009.