CBSE 2016 Class 12 Economics Delhi Set-1 | Question 7

CBSE 2016 Class 12 Economics Delhi Set-1

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Question : 7

Total: 18

Distinguish between marginal propensity to consume and average propensity to consume. Give a numerical example.

Solution:

Marginal Propensity to Consume	Average Propensity to Consume
(i) The ratio of change in consumption (∆C) due to change in income (∆Y) is called marginal propensity to consume.	The ratio of total consumption expenditure to total income is called average propensity to consume.
‌ (ii) ‌MPC=∆C∕∆Y	APC=C∕Y
(iii) MPC is always greater than zero but less than 1.	APC can be greater or less than 1 but can never be zero because at zero income, survival needs minimum consumption.
(iv) MPC falls more rapidly with rise in income.	APC falls as income rises.
(v) Eg - if income of a country increases from ₹5000 crores to ₹5500 crores, consumption expenditure goes up from ₹ 4000 crores to ₹4300 crores, then : MPC =∆C∕∆Y=300∕ 500=3∕5=0.6 or 60 paise.	Eg - Aggregate income of the economy =₹ 5000 crores and agrregate consumption is ₹ 4500 crores, then : ‌APC=C∕Y=4500∕ 5000=0.90‌ or ‌90%

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