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Average Propensity to Consume

Reviewed by Sweta | Updated on Sep 30, 2020

Catalogue

Introduction

The average propensity to consume can be referred to as the percentage of income spent on goods and services by an individual. It is arrived at by dividing the total amount spent on household consumption by the total disposable income.

What is Average Propensity to Consume

An increase in the average propensity to consume denotes a high demand for goods and services. An increase or decrease in the average propensity to consume also determines the propensity to save. The opposite of the average propensity to consume is the average propensity to save.

Why is Average Propensity to Consume Important?

A tendency of incremental savings has a negative effect on the average propensity to consume. High-income households have a less average propensity to save. However, in the case of a fresh earner, an increase in income has an incremental effect on the average propensity to consume.

Low-income families have a higher propensity to consume. They tend to spend most of their monthly earnings on essential goods and services.

The average propensity to consume and the savings ratio are expressed as a percentage of the total disposable income.

Consumer spending helps in boosting the economy. When there is a high demand for the supply of goods, more goods are purchased, more people are employed, and more business are open.

When people have a tendency to save, it can negatively affect the economy as people purchase fewer goods and services. It indicates that there is a low demand for goods and services, resulting in fewer jobs, and increased business closures.

Ideally, the sum of the average propensity to consume and the average propensity to save is equivalent to one. This is due to the fact that households use all income for either saving or consumption.

Contrary to the average propensity to consume, the APS is calculated as the percentage of total income used for saving rather than spending on goods and services. The average propensity to consume could also be calculated by subtracting the APS from 1.

The APS is also known as the savings ratio, and it is usually expressed as a percentage of total household disposable income (income minus taxes).

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