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December 31, 2018

Average and Marginal Propensity to Save - APS vs MPS

December 31, 2018


Propensity to save represents relationship between saving and income. Saving depends upon the level of income. The greater the level of income, the greater will be the saving ratio. Generally, people consume more and save less in the situation of optimism. On the other hand, people tend to save more and consume less in the situation of pessimism. Let’s understand average propensity to save and marginal propensity to save.

Average Propensity to Save - APS

Average propensity to save is the ratio of saving to income. Given below is the mathematically representation of APS:

APS = S/Y

Where

APS = Average Propensity to save

S = Saving

Y = Income

Example:

Suppose, if income is Rs. 400 million and consumption is Rs. 300 million. So, the saving will be (400 - 300) Rs. 100. Let’s, calculate the APS from this example:

APS = 100/400

APS = 0.25

The APS can also be calculated by subtracting average propensity to consume (APC) from 1. For this method, first we will have to calculate the APC. We can find out APC from the above example.

APC = C/Y

APC = 300/400

APC = 0.75

So, the APS will be:

APS = 1 -APC

APS = 1 - 0.75

APS = 0.25

Marginal Propensity to Save - MPS

Marginal propensity to save is the ratio of change in saving to change in income. It can be expressed as:

MPS = S/Y

Where

MPS = Marginal propensity to Save

S = Change in saving

Y = Change in income

Example:

Suppose, if income rises from Rs. 200 million to Rs. 300 million and saving rises from Rs. 100 million to Rs. 150 million. So, the marginal propensity to save will be:

MPS = 50/100

MPS = 0.5

There is also another method of calculating MPS which is following:

MPS = 1 - MPC

Lets’ first calculate the MPC from the above example.

MPC = C/Y

MPC = 50/100

MPC = 0.5

So, the MPS will be:

MPS = 1 - MPC 

MPS = 1 - 0.5

MPS = 0.5

Let’s understand the concept of average and marginal propensity to save with the help of an imaginary schedule.

APS and MPS

The above table shows that as much as the level of income is increasing the level of consumption is also increasing but not in the same proportion as income. We can see APS is increasing but MPS is increasing more than APS.
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