Understanding MPC, MPS, and the Key Economic Relationship

In economics, specifically in macroeconomics, we study how changes in income affect consumption and saving. Two important concepts related to this are the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS).

The question asks what should be added to the Marginal Propensity to Consume (MPC) to get a result of 1.

Defining MPC and MPS

• Marginal Propensity to Consume (MPC): This measures how much consumption changes when disposable income changes by a small amount. It's the ratio of the change in consumption ($\Delta C$) to the change in disposable income ($\Delta Y_d$).

  Mathematically, $\text{MPC} = \frac{\Delta C}{\Delta Y_d}$.

• Marginal Propensity to Save (MPS): This measures how much saving changes when disposable income changes by a small amount. It's the ratio of the change in saving ($\Delta S$) to the change in disposable income ($\Delta Y_d$).

  Mathematically, $\text{MPS} = \frac{\Delta S}{\Delta Y_d}$.

The Relationship Between MPC and MPS

When a person receives an additional amount of disposable income ($\Delta Y_d$), they can only do two things with it: either spend it on consumption ($\Delta C$) or save it ($\Delta S$). Assuming there are no taxes on this additional income and it's all disposable, the change in income must be equal to the sum of the change in consumption and the change in saving:

$\Delta Y_d = \Delta C + \Delta S$

Now, if we divide both sides of this equation by the change in disposable income ($\Delta Y_d$), we get:

$\frac{\Delta Y_d}{\Delta Y_d} = \frac{\Delta C}{\Delta Y_d} + \frac{\Delta S}{\Delta Y_d}$

This simplifies to:

$1 = \text{MPC} + \text{MPS}$

This fundamental equation shows that the sum of the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) is always equal to 1.

Therefore, to find the result 1 by adding something to MPC, that something must be MPS.

Why Other Options are Incorrect

Let's look at the other options provided:

• Average Propensity to Save (APS): This is the ratio of total saving (S) to total disposable income (Y_d). $\text{APS} = \frac{S}{Y_d}$. APS is related to Average Propensity to Consume (APC), where APC + APS = 1, but it is not what's added to MPC to get 1.
• Average Propensity to Consume (APC): This is the ratio of total consumption (C) to total disposable income (Y_d). $\text{APC} = \frac{C}{Y_d}$. As mentioned, APC + APS = 1. APC is a measure of the average tendency to consume, not the marginal tendency, and it's related to APS, not MPC, in the context of summing to 1.
• MPC: Adding MPC to itself (MPC + MPC) would result in 2*MPC, not 1 (unless MPC happens to be 0.5, which is a specific value, not a general rule).

Based on the economic relationship $\text{MPC} + \text{MPS} = 1$, adding MPS to MPC gives the result 1.

Revision Table: MPC and MPS Relationship

Additional Information on Consumption and Saving

The concepts of MPC and MPS are central to understanding the Keynesian consumption function. The consumption function is often expressed as $C = a + bY_d$, where 'a' is autonomous consumption (consumption independent of income) and 'b' is the induced consumption (MPC). Saving is derived from disposable income minus consumption ($S = Y_d - C$). Therefore, $S = Y_d - (a + bY_d) = -a + (1-b)Y_d$. In this equation, '-a' represents autonomous saving (dissaving) and '(1-b)' is the MPS, since if MPC is 'b', then MPS must be (1-b) to sum to 1.

Understanding MPC and MPS is crucial for analyzing economic multipliers, which show how changes in spending or investment can have a larger impact on overall economic output.