The Impact of Average Propensity to Consume and Marginal Propensity to Consume on Financial Planning

How do Average Propensity to Consume and Marginal Propensity to Consume affect financial planning?

What is the relationship between personal income and consumption patterns?

Answer:

The concepts of Average Propensity to Consume and Marginal Propensity to Consume represent the proportion of income that is spent on consumption. For instance, if MPC is 0.8, for each extra dollar of income, 80 cents will be used for consumption. Spending patterns may vary according to personal income, geography, and individual preferences.

Explanation:

The question is referring to the concept of the Average Propensity to Consume (APC) and the Marginal Propensity to Consume (MPC), which are fundamental concepts in economics.

In essence, APC refers to the percentage of income spent on consumption, while MPC is the change in consumption for each additional dollar of income.

For example, if Becky's Average Propensity to Consume is calculated as ($85,000 - $5,000) ÷ $85,000 = 94%. This means that she spends 94% of her income on consumption. When it comes to the Marginal Propensity to Consume, if the MPC is 0.8, this means that for each additional dollar earned, 80 cents will be spent on consumption.

Furthermore, as demonstrated in the Consumer Expenditure Survey, Americans on average spent $48,109 on consumption out of their income in 2015. This varied based on family income, geography, and personal preferences.

It is crucial to understand these concepts in financial planning to ensure a balanced approach towards spending and saving, taking into consideration individual income levels and consumption habits.