What is meant by an average propensity to consume? Explain its relatio

1.	What is meant by an average propensity to consume? Explain its relationship with average propensity to save.
Answer» Average propensity to consume (APC) is the ratio of consumption expenditure and the level of income in an economy. APC = C/Y where C = Consumption Y = Level of income APC indicates the percentage of income spent in the form of consumption expenditure in an economy. If the income of an economy is 100 crores and the consumption expenditure is 65 crores, then APC = 65/100 = 0.65. In this example, 65 per cent of income in the economy is spent in the form of consumption expenditure. The relationship between APC and APS is described below: The average propensity to save is the proportion of the income that is saved APS = S/Y where S = Saving Y = Level of income We know that Y = C + S Dividing the equation by Y throughout 1 = C/Y + S/Y 1 = APC + APS The sum of Average propensity to consume and average propensity to save is equal to 1.

What is meant by an average propensity to consume? Explain its relationship with average propensity to save.

Answer»

Average propensity to consume (APC) is the ratio of consumption expenditure and the level of income in an economy.

APC = C/Y

where

C = Consumption

Y = Level of income

APC indicates the percentage of income spent in the form of consumption expenditure in an economy. If the income of an economy is 100 crores and the consumption expenditure is 65 crores, then APC = 65/100 = 0.65. In this example, 65 per cent of income in the economy is spent in the form of consumption expenditure.

The relationship between APC and APS is described below: The average propensity to save is the proportion of the income that is saved APS = S/Y

where

S = Saving

Y = Level of income

We know that Y = C + S

Dividing the equation by Y throughout

1 = C/Y + S/Y

1 = APC + APS

The sum of Average propensity to consume and average propensity to save is equal to 1.

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