Average propensity to consume (APC) (as well as the marginal propensity to consume) is a concept developed by John Maynard Keynes to analyze the consumption function, which is a formula where total consumption expenditures (C) of a household consist of autonomous consumption (Ca) and income (Y) (or disposable income (Yd)) multiplied by marginal propensity to consume (c1 or MPC). According to Keynes, the individual's real income determines saving and consumption decisions.[1]
Consumption function:
The average propensity to consume is referred to as the percentage of income spent on goods and services.[2] It is the proportion of income that is consumed[3] and it is calculated by dividing total consumption expenditure (C) by total income (Y):
It can be also explained as spending on every monetary unit of income.
Moreover, Keynes's theory claims that wealthier people spend less of their income on consumption than less wealthy people. This is caused by autonomous consumption as everyone needs to eat and get dressed, so they buy a certain amount of food and clothes or pay rent, they all spend some amount of money on these necessities. So the ratio is falling with higher income and wealth. This is why it seems like the poor consume more than the rich. But they only need to spend larger amount of their income on consumption because they have less money available.
Average propensity to consume is not as significant as the marginal propensity to consume (MPC) which represents an additional change in consumer spending as a result of an additional change in household income per monetary unit [4] and it is calculated as derivative of consumption function with respect to income (ratio of change in consumption to change in income). It is used for calculating multiplier in aggregate expenditures model.
^"Propensity to Consume - Average Propensity to Consume (APC) - Marginal Propensity to Consume (MPC) - Meaning and Definition - Explanation - Schedule - Diagram - Formula - Example - Economicsconcepts.com". economicsconcepts.com. Retrieved 2021-04-27.
^"Average Propensity to Consume - Definition, Understanding, and Why Average Propensity to Consume is Important?". cleartax.in. Retrieved 2021-04-28.
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