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APC and MPC in Consumption Function | Macro Economics

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The upcoming discussion will update you about the Relationship between APC and MPC in Consumption Function.

Consumption function denotes the functional relation between consumption and income.

Whereas the MPC refers to the marginal increase in consumption (∆C) as a result of marginal increase in income (∆Y), APC means the ratio of total consumption to total income (C/Y):

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1. We have seen above that in case of a curved consumption function, as income increase, the MPC as well as the APC both decline, but the decline in the MPC is more than the decline in MPC. In other words, both the propensities decline with an increase in income, though the decline in one (MPC) is greater than the decline in the other (APC).

2. When MPC is constant, the consumption function is linear i.e., straight line. The APC will be constant only if the consumption function passes through the origin. However, if it does not pass through the origin, APC will not be constant.

3. Sometimes the MPC and APC may be equal. It is the case when MPC is constant, that is when the consumption function is linear. Suppose income rises, and of this extra income only 80% is spent on consumption; in that case MPC will be 80% or 0.8. Since the MPC is to remain constant and if the APC also happens to be 0.8, both MPC and APC will be equal.

4. MPC is higher is case of poor communities and lower in case of rich communities. The reason is that in case of rich communities most of their basic needs have already been fulfilled and all the additional increments in income are saved (leading to higher MPS), whereas in poor communities most of their primary needs remain unfulfilled, so that additional increase in income lead to increase their consumption. That is why in backward countries like India, Pakistan, Burma and Indonesia, MPC is higher while in advanced countries like the U.S.A. and U.K. it is lower. (Sometimes MPC and APC in advanced countries assume constant value as pointed out by Prof. Hansen and broadly speaking become the cause of flattening of the C curve causing deficiency of effective demand and creating poverty amidst plenty).

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