Marginal propensity to consume facts for kids

The marginal propensity to consume (often called MPC) is a way to measure how much more money people spend when they get extra income. Imagine someone gets an unexpected bonus. MPC tells us what part of that extra money they are likely to spend.

When people have more money after taxes and bills (this is called disposable income), they usually spend more. This idea is known as induced consumption. MPC specifically looks at the extra spending from extra income.

For example, if a family gets an extra dollar and their MPC is 0.65, it means they will spend 65 cents of that dollar and save the other 35 cents. People can't spend more than the extra money they received without borrowing!

A famous economist named John Maynard Keynes suggested that MPC is always less than one. This means people will always save at least a little bit of any extra money they get. Also, people with less money often have a higher MPC than richer people. This is because they tend to spend a larger part of any extra income they receive on things they need.

What is MPC?

MPC stands for Marginal Propensity to Consume. It's a key idea in economics that helps us understand how people react when their income changes. It measures the change in spending that happens when someone's income changes.

How it Works

To figure out the MPC, economists look at how much someone's spending changes compared to how much their income changes.

Here's a simple way to think about it:

• Imagine you get an extra $100.
• If you spend $80 of that extra $100, your MPC is 0.80 (because $80 divided by $100 is 0.80).
• The remaining $20 is what you save.

So, the formula for MPC is:

• MPC = (Change in Spending) / (Change in Income)

Let's look at an example:

In this example:

• Your income changed by $60 (from $120 to $180).
• Your spending changed by $50 (from $120 to $170).
• So, your MPC is $50 / $60 = 0.83 (or 83%). This means for every extra dollar, you spent 83 cents.

Why it Matters

Understanding MPC is important for governments and economists. When a government wants to boost the economy, they might give people extra money (like tax refunds or stimulus checks). Knowing the MPC helps them guess how much of that money people will spend, which can help businesses and create jobs.

If people have a high MPC, it means they are likely to spend most of any extra money they get. This can help the economy grow faster. If people have a low MPC, they might save more, which means the economy might not get as big a boost from extra income.

Related topics

• Average propensity to save
• Average propensity to consume
• Keynesian economics

See also

In Spanish: Propensión marginal al consumo para niños