APC vs MPC: Difference and Comparison

What is APC?

The Average Propensity to Consume (APC) is an economic term that measures the proportion of a person’s or a household’s income that is spent on consumption, expressed as a percentage. It is an important concept in Keynesian economics and is used to analyze consumption patterns within an economy.

The APC is useful in understanding how individuals or households allocate their income between spending and saving. It provides insights into consumption behavior and can be used by economists and policymakers to analyze the impact of changes in income levels on consumption and overall economic activity.

What is MPC?

The Marginal Propensity to Consume (MPC) is an important concept in economics that measures the change in consumption (the amount of additional money spent on goods and services) in response to a change in income. In other words, it quantifies how much additional income will be spent rather than saved.

The concept of MPC is significant in macroeconomics and fiscal policy because it helps economists and policymakers understand how changes in income, such as government stimulus payments or changes in taxes, will affect overall consumption and, consequently, aggregate demand in an economy. A higher MPC implies that a larger proportion of additional income is spent, which can boost economic activity. Conversely, a lower MPC suggests that people save more of their additional income, which may have a smaller stimulating effect on the economy.

Main Differences Between APC and MPC

1. APC measures the average proportion of a person’s or household’s total income that is spent on consumption over a period of time. It is a ratio of total consumption to total income. MPC, on the other hand, focuses on the change in consumption in response to a change in income. It measures the proportion of any additional income that is spent on consumption.
2. APC is calculated as APC = (Consumption / Income) * 100, where both consumption and income are aggregated over a specific period, a year. MPC is calculated as MPC = ΔC / ΔY, where ΔC represents the change in consumption, and ΔY represents the change in income.
3. APC gives an average picture of a person’s or household’s spending habits over time. It tells you what percentage of their income is spent on consumption. MPC tells you the incremental change in consumption that occurs when income changes. It quantifies how responsive consumption is to changes in income.
4. APC is used to analyze long-term consumption patterns and to assess how different income groups allocate their income between spending and saving. MPC is more relevant for short-term economic analysis and policymaking. It helps economists and policymakers understand how changes in income, such as government stimulus or tax cuts, impact immediate consumer spending.
5. Changes in APC may not directly reflect changes in economic conditions or government policies because it is an average over time. It might remain relatively stable even when economic conditions change. MPC is crucial for understanding the immediate effects of changes in income or fiscal policies on consumption and, by extension, on aggregate demand and economic growth. It informs decisions related to stimulus packages and taxation.

Comparison Between APC and MPC

Parameters of Comparison	APC	MPC
Focus	Average consumption habits over a period	Incremental change in consumption with income
Calculation	APC = (Consumption / Income) * 100	MPC = ΔC / ΔY
Interpretation	What percentage of total income is spent on average	What portion of additional income is spent
Timeframe	Reflects long-term consumption patterns	Pertains to short-term changes in consumption
Economic Stimulus	Less useful for assessing immediate stimulus	Crucial for understanding immediate stimulus

References

1. https://onlinelibrary.wiley.com/doi/abs/10.3982/QE694
2. https://www.aeaweb.org/doi/10.1257/mac.20160287

Last Updated : 30 January, 2024