Describe the importance of consumption propensity in economic analysis.
Answers
Propensity to consume, in economics, the proportion of total income or of an increase in income that consumers tend to spend on goods and services rather than to save. The ratio of total consumption to total income is known as the average propensity to consume; an increase in consumption caused by an addition to income divided by that increase in income is known as the marginal propensity to consume. Because households divide their incomes between consumption expenditures and saving, the sum of the propensity to consume and the propensity to save will always equal one.The average propensity to consume out of current income is usually thought to be higher for low-income families than for high-income families. Families in the lowest income bracket, for example, may be forced to dissave or go into debt merely to provide themselves with basic necessities, whereas these same necessities require a much smaller proportion of high incomes. The low-income family’s average propensity to consume may therefore be greater than one and the high-income family’s some fraction of one.