Determination of Income and Employment
Planned values and the consumption function
Read a consumption function and find MPC, MPS and consumption at an income.
Two Latin words help here: ex ante means planned (what people intend), and ex post means actual (what really happened). They can differ: a firm may plan to invest ₹200 in new stock, but if sales are better than expected its stock grows by only ₹150, so actual investment is ₹150.
The consumption function shows how planned consumption depends on income:
C = C̄ + cY
- C̄ is autonomous consumption: what people consume even at zero income (by borrowing or using savings).
- cY is induced consumption: the part that depends on income.
Marginal propensity to consume (MPC, or c) = ΔC ÷ ΔY: the share of extra income that is consumed. It lies between 0 and 1. The marginal propensity to save (MPS, or s) = ΔS ÷ ΔY. Since extra income is either consumed or saved, MPC + MPS = 1.
The average propensities: APC = C ÷ Y and APS = S ÷ Y.
Example: C = 50 + 0.6Y. At zero income, people consume 50. If income rises by 100, consumption rises by 60. At Y = 500: C = 50 + 300 = 350, S = 500 − 350 = 150, APC = 0.7, and MPS = 0.4.
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