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Why is the marginal propensity to consume and the marginal propensity to save always...

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ghghghgh | Student, Undergraduate | eNotes Newbie

Posted April 10, 2010 at 1:51 PM via web

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Why is the marginal propensity to consume and the marginal propensity to save always equal to one?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 10, 2010 at 1:54 PM (Answer #1)

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The reason for this is that there are only really two things that you can do with your money.  You can spend it or you can save it, but there is no third option.

The marginal propensity to consume is a measure of how much of your next dollar (the next dollar you get) you will spend.  The marginal propensity to save measures how much of your next dollar you will save.

So the two of these measures added together have to equal one because there is no other option for what you can do with your money.

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krishna-agrawala | College Teacher | Valedictorian

Posted April 10, 2010 at 11:01 PM (Answer #2)

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Any increase in the disposable income is apportioned by individuals and households for two purposes. Part of the additional income is used for increasing expenses, and the rest is used for increasing the saving. At any point of total disposable income, the sum of total saving plus total expenses of an individual is exactly equal to the disposable income. Also any increase in disposable income is exactly equal to sum of corresponding increases in expenditure and saving.

The marginal propensity to consume and save are defined as:

Marginal propensity to consume

= (Marginal increase in consumption)/(Marginal increase in consumption)

And Marginal propensity to save

= (Marginal increase in saving)/(Marginal increase in consumption)

Therefore sum of marginal propensity to consume and marginal propensity to save is:

= [(marginal increase in expenditure) + (Marginal increase in saving)]/(Marginal increase in consumption)

= (Marginal increase in consumption)/(Marginal increase in consumption)

= 1

Thus sum of marginal propensity to consume and marginal propensity to save is always equal to 1.

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