Saturday, January 28, 2012

Why is the marginal propensity to consume and the marginal propensity to save always equal to one?

Any increase in the disposable income is apportioned by
individuals and households for two purposes. Part of the additional income is used for
increasing expenses, and the rest is used for increasing the saving. At any point of
total disposable income, the sum of total saving plus total expenses of an individual is
exactly equal to the disposable income. Also any increase in disposable income is
exactly equal to sum of corresponding increases in expenditure and
saving.


The marginal propensity to consume and save are
defined as:


Marginal propensity to
consume


= (Marginal increase in consumption)/(Marginal
increase in consumption)


And Marginal propensity to
save


= (Marginal increase in saving)/(Marginal increase in
consumption)


Therefore sum of marginal propensity to
consume and marginal propensity to save is:


= [(marginal
increase in expenditure) + (Marginal increase in saving)]/(Marginal increase in
consumption)


= (Marginal increase in consumption)/(Marginal
increase in consumption)


=
1


Thus sum of marginal propensity to consume and marginal
propensity to save is always equal to 1.

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