Marginal Propensity to Consume (MPC)
What is Marginal Propensity to Consume (MPC)?
The marginal propensity to consume is the fraction of each additional dollar of disposable income that households spend.
It ranges between 0 and 1 and determines the size of the spending multiplier. A higher MPC means more of any new income is re-spent, amplifying changes in aggregate demand. The MPC and the marginal propensity to save (MPS) always sum to 1.
Marginal Propensity to Consume (MPC): a worked example
A household's disposable income rises from $42,000 to $46,500, an increase of $4,500. Its consumption rises from $35,000 to $38,600, an increase of $3,600. MPC = $3,600 ÷ $4,500 = 0.8, meaning 80 cents of every extra dollar gets spent. MPS is 1 - 0.8 = 0.2, and the $900 left unspent confirms it: 900 ÷ 4,500 = 0.2. The spending multiplier is 1 ÷ (1 - 0.8) = 1 ÷ 0.2 = 5, so a $30 billion increase in investment raises real GDP by 30 × 5 = $150 billion at the current price level. The ratio runs in reverse as well: had disposable income fallen by $4,500, this household would have cut consumption by $3,600.
The mistake students make with marginal propensity to consume (mpc)
Dividing total consumption by total income gives the average propensity to consume, not the MPC, and the answer looks plausible enough to survive a second glance: $38,600 ÷ $46,500 = 0.83 rather than the correct 0.8. Always work from changes, ΔC ÷ ΔYd. The other trap is using pre-tax income in the denominator. MPC is measured against disposable income, so if gross pay rises $4,500 and taxes take $700, the denominator is the $3,800 that actually reaches the household.
Marginal Propensity to Consume (MPC) questions
How do you calculate MPC?
Divide the change in consumption by the change in disposable income, written MPC = ΔC ÷ ΔYd. If disposable income rises $4,500 and consumption rises $3,600, then MPC = 3,600 ÷ 4,500 = 0.8. The same ratio is the slope of a consumption function, so a graph can supply it directly, and any question that hands you the marginal propensity to save gives it away too, since MPC = 1 - MPS.
Can the MPC be greater than 1?
MPC above 1 would mean a household spends more than every extra dollar it receives, which requires borrowing or drawing down past savings. A single household can do that in a single period, but AP Economics treats the MPC as a fraction between 0 and 1, since MPC + MPS = 1 and the model assumes some share of new income is saved. A negative MPS on an exam signals an arithmetic error.
Why does a higher MPC make the multiplier larger?
Each round of spending passes along a bigger share of income when the MPC is high. With an MPC of 0.8, one dollar of new spending becomes 80 cents in the next round, then 64 cents, and the chain totals 1 ÷ 0.2 = $5. With an MPC of 0.5 the chain fades faster and totals only 1 ÷ 0.5 = $2. Less leakage into saving means more rounds of re-spending and a larger change in real GDP.
Formula / Example
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