If you are at a lower income level, any extra income that comes in will (statistically) see a high marginal propensity to consume. Below are four factors to take into account when calculating MPC. There are a number of factors that play into how marginal propensity to consume is calculated.
Related: What Is a Firm in Economics? Factors that Determine MPC Marginal propensity to consume calculates what percentage of that $500 is spent on buying things and what percentage is put away in savings.īelow, we break down MPC to learn more about how it’s calculated and why it’s important in economics. How do you use the extra money? Is it put away in savings? Is it spent on a weekend vacation? How have you added it into your monthly expenses? To use an example, let’s say you get a raise at work and start to earn an extra $500 a month. Marginal: A function of a random variable obtained from several other variablesĪfter breaking down the phrase, MPC literally means creating a function using our preference for spending or saving money.Let’s take a look at the meaning of each word in this phrase. The economic definition of this phrase is the amount of extra income you spend on the consumption of goods and services. MPC stands for marginal propensity to consume. Related: Ultimate Guide to Economics Understanding MPC So, is MPC practical or theoretical, and why should you care? On the other hand, theoretical economics looks at theoretical numbers and their theoretical impact on the real world. How are you really spending your money? What are the best tried and true ways to save money? In practical economics, you focus on how economics directly affects people in the real world. There are two sides to economics: the theoretical and the practical.
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