What is the Marginal Propensity to Consume (MPC)?

The Marginal Propensity to Consume (MPC) is defined as the increase in consumer spending that results from an increase in disposable income, specifically when disposable income rises by a certain amount, often represented as $1. This concept is crucial in macroeconomic theory, as it helps explain how consumption behavior changes in response to income fluctuations.

When consumers receive additional income, their willingness to spend some portion of that income will vary, and the MPC quantifies this relationship. For example, if the MPC is 0.8, it means that for every additional dollar of disposable income, consumers will spend 80 cents and save 20 cents. This is essential for understanding how changes in income levels can influence overall economic activity, as higher consumer spending fosters increased demand for goods and services, consequently stimulating economic growth.

In contrast, total consumer spending in an economy represents a broader measure and does not account for how that spending responds to changes in income, making it a different concept altogether. Similarly, the percentage of income saved reflects saving behavior rather than the propensity to consume with respect to changing income levels. Lastly, a fixed amount consumers spend regardless of income does not capture the nuanced relationship between income changes and consumption, which is central to the definition of MPC.