Marginal Propensity to Consume (MPC) Calculator

What Is the Marginal Propensity to Consume?

The marginal propensity to consume (MPC) is the share of an extra amount of disposable income that people spend on goods and services instead of saving. The word marginal means it looks only at the change: the next dollar of income, not the income already earned. An MPC of 0.75 means that out of every extra 1 of income, 0.75 is spent and 0.25 is saved.

The idea comes from John Maynard Keynes, who set it out in The General Theory of Employment, Interest and Money in 1936. He argued that when income rises, spending also rises, but by less than the rise in income. That puts the MPC between 0 and 1 in normal conditions, and it makes the MPC the starting point for the Keynesian multiplier.

MPC Formula

• MPC: the marginal propensity to consume, a number with no unit.
• ΔC: the change in consumer spending, new spending minus old spending.
• ΔYd: the change in disposable income, new income minus old income.

Both changes must cover the same period and use the same currency. The change in income cannot be 0, because the formula divides by it. To turn the MPC into a percent, multiply by 100: an MPC of 0.75 means 75% of the extra income is spent.

How to Calculate MPC

A household sees its disposable income rise by 20,000 in a year. Over the same year its spending rises by 15,000:

1. Find the change in disposable income. Subtract the old income from the new income: 20,000.
2. Find the change in consumer spending. Subtract the old spending from the new spending: 15,000.
3. Divide spending change by income change. 15,000 ÷ 20,000 = 0.75.

The MPC is 0.75. Three quarters of the extra income was spent, and the remaining 5,000 was saved.

The Consumption Function: C = C₀ + MPC × Yd

The MPC is the slope of the Keynesian consumption function, a straight line that links total consumer spending to disposable income:

• C: total consumer spending.
• C₀: autonomous spending, the amount spent even when disposable income is 0. It is paid for from savings or borrowing.
• MPC × Yd: induced spending, the part that depends on income.
• Yd: disposable income.

With autonomous spending of 5,000, an MPC of 0.75 and disposable income of 100,000:

Consumer spending is 80,000, so saving is 100,000 − 80,000 = 20,000. Fill in the two optional fields and the calculator shows these figures under the MPC.

MPC vs APC

The average propensity to consume (APC) is total spending divided by total income, C ÷ Yd. The MPC looks at the change, the APC looks at the level. In the example above:

When autonomous spending is above 0, the APC is always higher than the MPC, and it falls toward the MPC as income grows. The table uses C = 5,000 + 0.75 × Yd:

The MPC stays at 0.75 in every row. At an income of 20,000 spending equals income, so saving is 0. This break-even income is C₀ ÷ (1 − MPC) = 5,000 ÷ 0.25 = 20,000. Below it the household spends more than it earns.

MPC and MPS Add Up to 1

Every extra unit of disposable income is either spent or saved, so the marginal propensity to consume and the marginal propensity to save (MPS) always add up to 1:

The calculator shows the MPS as a row under the result. If you have the change in saving instead of the change in spending, use our MPS Calculator.

MPC and the Spending Multiplier

Money that one person spends becomes income for someone else, who spends part of it again. With an MPC of 0.8, a first round of 1,000 in new spending leads to 800 in the second round, 640 in the third, and so on. The rounds add up to the simple spending multiplier:

So 1,000 of new spending raises total income by up to 1,000 × 5 = 5,000 in this simple model.

The simple multiplier ignores taxes, imports and price changes, so real multipliers are smaller. For more detail see our Spending Multiplier Calculator.

How to Read the MPC

A high MPC means changes in income pass quickly into spending, so tax cuts or transfer payments have a larger effect on demand. A low MPC means more of the extra income is held back as saving.

What Affects the MPC?

• Income level. Lower income households tend to spend a larger share of extra income, because more of their budget goes on needs. Higher income households tend to save more of it.
• Temporary or permanent change. People spend more out of a lasting pay rise than out of a one-off bonus or rebate.
• Access to credit and savings. Households with little cash on hand or tight credit limits tend to spend extra income quickly.
• Confidence. When jobs feel insecure, people save more of any extra income.
• Interest rates. Higher rates reward saving and make borrowing dearer, which can lower the MPC.
• Debt. Money used to pay down debt counts as saving, so heavily indebted households can show a lower MPC.

MPC Examples

A pay rise. Monthly take-home pay rises by 600 and monthly spending rises by 450:

A tax rebate. A household receives a 50 rebate and spends 45 of it, so MPC = 45 ÷ 50 = 0.9. If every household behaved the same way, a 200 rebate would add 200 × 0.9 = 180 to spending.

With a consumption function. Income rises by 2,000 and spending by 1,300, so MPC = 0.65. With autonomous spending of 12,000 and disposable income of 60,000:

Common Mistakes

• Using totals instead of changes. Total spending ÷ total income is the APC, not the MPC.
• Using income before tax. The MPC is measured against disposable income, which is income after taxes and transfers. Our Disposable Income Calculator finds it.
• Dividing the wrong way round. The change in spending goes on top and the change in income goes underneath.
• Mixing periods. A monthly change in spending cannot be divided by a yearly change in income.
• Treating the MPC as fixed. It differs between households and changes over time, so a textbook value is only a model.

Key Terms

Disposable income

Income left after taxes are paid and transfers are received, written Yd.

Autonomous spending

Consumer spending that does not depend on income, written C₀.

Induced spending

The part of consumer spending that rises with income, MPC × Yd.

MPS

Marginal propensity to save, the share of extra income that is saved. MPS = 1 − MPC.

APC

Average propensity to consume, total spending divided by total disposable income.

Multiplier

How many times a first round of spending raises total income, 1 ÷ (1 − MPC) in the simple model.

How to Use the Marginal Propensity to Consume (MPC) Calculator

1. Enter the change in disposable income. Type how much disposable income rose, such as 20,000.
2. Enter the change in consumer spending. Type how much spending rose over the same period, such as 15,000.
3. Add autonomous spending and disposable income (optional). Type autonomous spending, such as 5,000, and disposable income, such as 100,000, to also see total consumer spending, the APC and saving.
4. Read and copy the result. The MPC appears as you type, with the working, the MPS, the spending multiplier and a bar showing the spent and saved shares. Press Copy to copy it, or Clear or Esc to start again.

Example: income rises by 2,500 and spending rises by 2,000. The MPC is 2,000 ÷ 2,500 = 0.8.

Who Can Use This Calculator?

Frequently Asked Questions (FAQs)

Sources

• Wikipedia. Marginal propensity to consume.
• Wikipedia. Consumption function.
• Wikipedia. Average propensity to consume.
• Wikipedia. Fiscal multiplier.
• OpenStax. Principles of Economics 3e, Appendix D The Expenditure-Output Model.
• Econlib. Keynesian Economics.