Cambridge International as and a level Economics Ebook

disposable income
that is spent tends to fall. Economists 
refer to this proportion as the 
average propensity to 
consume
(apc):
apc: 
consumption
income
=
C
Y
When a person or country is poor, most if not all 
disposable income has to be spent to meet current needs. 
Indeed, consumption may exceed income with people 
or countries drawing on past savings or borrowing. Th
is 
situation can be referred to as 
dissaving
. However, when 
income rises, some of it can be saved. 
Saving 
is defi ned 
as disposable income minus consumption. Th
e average 
propensity to save (aps) is the proportion of disposable 
income which is saved and is equal to 1 minus apc. As 
income rises, the actual amount saved and aps tend to 
increase. Th
e rich usually have a lower apc and a higher 
aps than the poor.
Th
e rich also have a lower 
marginal propensity to 
consume
(mpc) and a higher marginal propensity to save 
(mps) than the poor. Th
e mpc is the proportion of extra 
income which is spent:
mpc: 
change in consumption
change in income
= Δ
Δ
C
Y
Average propensity to consume: 
the proportion of 
income that is consumed.
Dissaving: 
spending financed from past saving or from 
borrowing.
Saving: 
income minus consumption.
Marginal propensity to consume: 
the proportion of extra 
income that is spent.
KEY TERMS
1
− 
mpc gives mps which can also be calculated by:
change in saving
change in income
= Δ
Δ
S
Y
Th
e relationship between consumption and income and 
saving and income can also be investigated by using the 
consumption and saving functions. Th
e