Marginal Propensity To Consume - Significance of MPC

Significance of MPC

The MPC is the rate of change in the APC. When income increases, the MPC falls but more than the APC. Contrariwise, when income falls, the MPC rises and the APC also rises but at a slower rate than the former. Such changes are only possible during cyclical fluctuations whereas in the short-run there is no change in the MPC and . Keynes is concerned primarily with the MPC, for his analysis pertains to the short-run while the APC is useful in the long-run analysis. The post-Keynesian economists have come to the conclusion that over the long-run APC and MPC are equal and approximate 0.9. In the Keynesian analysis the MPC is given more prominence. Its value is assumed to be positive and less than unity which means that when income increases the whole of it is not spent on consumption. On the contrary, when income falls, consumption expenditure does not decline in the same proportion and never becomes zero. The Keynesian hypothesis is that the marginal propensity to consume is positive but less than unity is of great analytical and practical significance. Besides telling us that consumption is an increasing function of income and it increases by less than the increment of income, this hypothesis helps in explaining 1) The theoretical possibility of general overproduction or ‘underemployment equilibrium’ and also 2) The relative stability of a highly developed industrial economy. For it imply that the gap between income and consumption at all high levels of income is too wide to be easily filled by investment with the possible consequences that the economy may fluctuate around underemployment equilibrium. Thus the economic significance of the MPC lies in filling the gap between income and consumption through planned investment to maintain the desired level of income.