marginal propensity to consume

The marginal propensity to consume (MPC) is a key concept in economics that measures how much of an increase in income consumers tend to spend on goods and services, rather than save. It is calculated as the change in consumption divided by the change in income.1

The MPC is considered more significant than the average propensity to consume because it plays a crucial role in the multiplier effect. This effect suggests that an initial change in spending, such as an increase in investment or government spending, can lead to a larger overall change in national income. For example, if people spend a portion of their increased income, that spending becomes income for others, who then spend a portion of it, creating a chain reaction.123

Economists like Milton Friedman have noted that lower-income households tend to have a higher MPC, meaning they spend a larger proportion of any extra income they receive, compared to higher-income households. This has implications for understanding the short-term effects of economic policies like tax cuts.4