Marginal Propensity to Consume Formula

Marginal Propensity to Consume Formula (Table of Contents)

Marginal Propensity to Consume Formula
Examples of Marginal Propensity to Consume Formula (With Excel Template)
Marginal Propensity to Consume Formula Calculator

Marginal propensity to consume can be termed as the metric that captures the quantity change in increase consumption with a change in increase of disposable income of a particular person or a population as a whole.

The formula for Marginal Propensity to Consume –

Marginal Propensity to Consume = ΔC / ΔY

where

ΔC: Change in Consumption
ΔY: Change in Income

Examples of Marginal Propensity to Consume Formula (With Excel Template)

Let’s take an example to understand the calculation of Marginal Propensity to Consume formula in a better manner.

You can download this Marginal Propensity to Consume Formula Excel Template here – Marginal Propensity to Consume Formula Excel Template

Marginal Propensity to Consume Formula – Example #1

Peter got a bonus amount of INR 1000 during the end of Financial Year. The rise in income has of INR 1000 has propelled him of extra spending of Goods and services by INR 750 during that month. Calculate the Marginal Propensity of Consumption of Peter.

Solution:

Marginal Propensity to Consume is calculated using the formula given below

Marginal Propensity to Consume = Amount of increase in Expenditure / Amount of increase in Income

Marginal Propensity to Consume = 750/ 1000
Marginal Propensity to Consume = 0.75

Thus, the Marginal propensity of Consume for Peter stands at 0.75.

Marginal Propensity to Consume Formula – Example #2

Borosil India Limited is a glass manufacturing company which manufactures glass products like several utensils which consumer’s uses for their normal livelihood. The number of units sold in 2016, 2017 and 2018 is 4000 units 4500 units and 5000 units. The average income of the consumers increased by 15% and 20% for 2017 and 2018 respectively. Calculate MPC of the average population for 2017 and 2018.

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Solution:

Percentage increase in Expenditure for 2017 is calculated as:

Percentage increase in Expenditure for 2017 = (4500 – 4000) / 4000
Percentage increase in Expenditure for 2017 = 12.5%

Percentage increase in Expenditure for 2018 is calculated as:

Percentage increase in Expenditure for 2018 = (5000 – 4500) / 4500
Percentage increase in Expenditure for 2018 = 11.11%

Marginal Propensity to Consume is calculated using the formula given below

Marginal Propensity to Consume = Percentage increase in Expenditure / Percentage change in income

MPC for the entire population in 2017

MPC for the entire population in 2017 = 12.5% / 15%
MPC for the entire population in 2017 = 0.83

MPC for the entire population in 2018

MPC for the entire population in 2018 = 11.11%/ 20%
MPC for the entire population in 2018 = 0.56

Thus, the Marginal propensity of Consume for the population for Borosil products stands at 0.83 and 0.56 in 2017 and 2018 respectively.

Marginal Propensity to Consume Formula – Example #3

Hindustan Unilever Limited is a soap manufacturing company which manufacturers soap as its Front-line product which consumer’s uses for their normal livelihood. The number of units sold in 2014, 2015 and 2016 is 10,000 units 12,000 units and 15,000 units. The average income of the consumers increased by 25% and 30% for 2015 and 2016 respectively. Calculate MPC of the average population for 2015 and 2016.

Solution.

Percentage increase in Expenditure for 2015 is calculated as:

Percentage increase in Expenditure for 2015 = (12000 – 10000) / 10000
Percentage increase in Expenditure for 2015 = 20%

Percentage increase in Expenditure for 2016 is calculated as:

Percentage increase in Expenditure for 2016 = (15000 – 12000) / 12000
Percentage increase in Expenditure for 2016 = 25%

Marginal Propensity to Consume is calculated using the formula given below

Marginal Propensity to Consume = Percentage increase in Expenditure / Percentage change in income

MPC for the entire population in 2015

MPC for the entire population in 2015 = 20% / 25%
MPC for the entire population in 2015 = 0.8

MPC for the entire population in 2016

MPC for the entire population in 2016 = 25% / 30%
MPC for the entire population in 2016 = 0.83

Thus, the Marginal propensity of Consume for the population for HUL products stands at 0.8 and 0.83 in 2015 and 2016 respectively.

Explanation

The marginal propensity to consume (MPC) is the percentage of a total increment in consumer expenditure on the consumption of goods and services with a percentage of change in his income. Marginal propensity to consume is a part of the Keynesian macroeconomic theory and the theory is derived from the change in consumption divided by the change in income. MPC is drawn by a consumption line, which is a sloped line created by plotting percentage change in consumption on the vertical “X” axis and with the percentage change in income on the horizontal “X” axis.

Relevance and Uses of Marginal Propensity to Consume Formula

Marginal Propensity to Consume formula is widely used as the barometer of consumer spending and extensively used by the Marketing department before launching a particular product or before the Production of a particular production process starts. The forecasting demand of a particular product is being calculated by the average change in income of the entire population along with the change in demand for goods and services.
The change in consumer spending is being tracked by the government numbers and it is being published periodically by the Government. However, there are other private Companies who are indulged in analytics, publishes these data which is used as the median for Consumption pattern, consumption sentiments, etc. For example, during recessions, the consumption decreases along with falling of prices of ‘Goods and Services’. The Income level of the general population also takes a downtrend. Thus if the degree of spending falls along with the degree of decrease in income, then the MPC would be 1. Thus, the manufacturing units would lower their production by the same volume as the fall in the income of the Population.
In the case of an increase in Spending during the rise in income level of the general population, the degree of increase in expenditure should be aligning with the degree of increase in income. Sometimes the percentage becomes less than 1, which indicates the percentage increase in income is not enough to determine the production process of the manufacturers. In these cases, the actual degree of MPC should be derived from the sample test which would eventually lead to the exact possible demand of the particular product.
The consumption pattern is extremely important for the business as there has been a constant evolution of new products due to changing tastes and preferences of the consumers. Thus, it is not always necessary to follow the change of a particular product but to perceive consumption as a whole. For example, Due to a decrease in income level, the consumer might choose product ‘X’ instead of product ‘Y’ due to a lower price of product ‘X’. But on the other hand, a similar trend might follow where most of the consumer is accepting product X instead of product Y. So, the market share of product X is increasing due to its competitive advantage of offering a better deal than Y. Thus, changes in income levels might not be the right cause for the falling market share of product Y.