Marginal Propensity to Consume (MPC)
Candlefocus EditorMPC varies by income level. Generally, households at lower levels of income tend to have a higher MPC than those at higher income levels. This is because households with lower incomes may need to use new income for immediate consumption to satisfy basic needs, whereas those with higher incomes may have greater flexibility in how they use new income, and may be more likely to invest or save a larger portion of it. Another factor that can influence MPC is the availability of credit to households, as households with access to credit may be able to use it to purchase consumer goods even if they have limited income.
In terms of overall economic outcomes, the impact of changes in income will be strongly shaped by the average level of MPC in the population. A higher MPC implies that a higher proportion of new spending will be dedicated to consumption, which provides an immediate economic stimulus but can also increase the savings rate at a slower pace. The ratio of MPC to the savings rate, often referred to as the "Keynesian multiplier", is a useful tool for determining the likely effects of a change in national spending levels. The higher the multiplier, the higher the economic output that is likely to be created from the same level of investment.
In summary, the Marginal Propensity to Consume is an important indicator of how likely households are to use new income for consumption, with lower-income households usually having a higher MPC than those at higher income levels. Furthermore, the level of average MPC in a population is a key determinant of the economic output that is likely to be created from a change in government spending, through a process known as the Keynesian multiplier.