Marginal Propensity To Consume - MPC
Categories: Econ
From the perspective of measuring income, or wealth, or savings, or any other way dough is accumulated by individuals and companies...the manner in which the dough is grown is kind of a neutral event. That is, people can make money, whether it be from a steady paying job with a W2 paycheck, or via the unemployment benefit checks courtesy of the working taxpayers after having been laid off, or by way of dividend income from stock investments, or interest income from loans, or by being paid as contractors for a dime an hour working for the kindly loving people at Shmoop.
When humans make money, they usually put some of it away in a savings account, or invest in assets like stocks and bonds. The rest? They spend it. Or maybe they spend first, and whatever is left over is called “savings.”
And there’s a natural balance here. Someone just scraping by, subsisting on ramen and renting part of a trailer in central Mississippi on 15 grand a year from their mosquito-circus-box-office-sales isn’t going to save much. If anything. And, in fact, people who live below the poverty line actually accumulate incrementally more debt, in a vicious cycle...such that their skimpy, occasional savings all end up going toward paying off previous debts, rather than buying comfort for the future.
At the other end of the spectrum are high salaried neurosurgeons and bankers who make $5 million a year, only to pay $2 million plus in taxes and keep $3 million. Were it not for those high tax paying top-end-earners in society, there’d be no money for little benefits to the central Mississippi dude. And on their $3 million of after-tax income, maybe they spend a million bucks to live. Private school for the kids. Maybe a fat mortgage payment. Alimony for wife #2.
The central Mississippi Trailer Dude will take the $5 you give him and spend it all to buy a nice hot meal. Jeff Bezos, on the other hand, saves a ton of money in various forms. He gets like $4 million a year in salary for running the largest retailer in the world.
But that money is kind of a joke compared to the $100 billion plus he owns in stock in the company. So he is some 250 times more incentivized to make the stock go up over time than he is just taking another million or three in salary.
The gist, however, is that the marginal income of fighting for, say, that extra million bucks...means nearly nothing to him. He has too many homes and a big jet and not much else to spend the money on. So he just saves the remainder...or in actual real life, just gives it away to charities, or spends it on pet projects like colonizing Mars as part of his "thank you" to the world for making him so rich by buying Prime.
When assessing the trade-off between spending and saving, economists focus on marginal dollars. Recall that a marginal dollar is the very next dollar you earn. The last one. After earning $58,983 in a year where you earned $58,984, the marginal dollar is the $58,984th. So for each marginal dollar you get, you’re likely to save some of it and spend the rest, if you’re a normal, non-superhero human like Bezos.
These behaviors are characterized by the Marginal Propensity to Save and the Marginal Propensity to Consume. Propensity is just a super fancy word for likelihood, or inclination...so you could say that Oxbridge-educated British people have a propensity to use excessively extravagant and florid language.
The higher an individual’s MPS, the more likely they are to save their next dollar. The highly productive, educated, hard-working big earners in society earn more than they actually “need,” so they save the rest.
The same is true for MPC, which implies that, the higher your MPC, the more likely you are to spend your next dollar, or the more of that next dollar you are likely to spend. So if you get an end-of-year bonus of $1,000 after tax (meaning the gross total bonus was, say, $1,600), you might be able to go to a nice dinner, buy some new clothes, and maybe get a subscription to your favorite magazine, because…well...you like it old school, and the free stuff just isn’t cutting it.
If all that tallies up to $650, and you put the remaining $350 into savings, the portion of the extra income you got, or your MPC, is 0.65, and your marginal propensity to save, or MPS, is 0.35. Since you save whatever you don’t end up spending, you know for sure that MPC + MPS = 1.
A poor person is much more likely to spend a dollar than a rich person, so some make the argument that increasing transfer payments, or reducing taxes for the poor, bolsters the economy for doing the same thing to the rich.
George from Podunk, Iowa sits in front of his dining room table covered in all of his bills, thinking to himself, “How did this happen?” His wife left him with two kids who both need dental work and heavy SAT tutoring, and have no prayer of a getting a new backpack, let alone hopping on the new fad of sneakers with a wheel in the heel. Any money that comes in to George gets spent immediately on food, keeping their home from freezing over, and paying off the mortgage on their house. In other words, George’s MPC is near 1, since money that comes in has to be spent on essentials.
Contrast George with Bezos’ spending habits, and the $150 billion fortune stored in his Amazon stock, and uh...you’ll get a very different picture.
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Econ: What is Personal Consumption Expen...3 Views
And finance Allah shmoop What is personal consumption expenditure Well
consumer spending makes up a big part of the U
S economy an estimated two thirds of it to be
exact Tracking consumer spending is a key to tracking the
overall economy Will the personal consumption expenditure is the formal
way to measure consumer spending Right So first what is
it consumer spending Example you work at Smooshy Love No
not that kind of company It's a company that makes
heart shaped pillows people by the pillows for you know
birthdays and Valentine's Day as a reward for getting their
annual cardiovascular checkups You know stuff like that All the
money spent on the pillows pays your salary Customers pace
mushy love for the pillows Smoochy Love gives some of
that money to you in the form of a paycheck
Then your paycheck allows you to buy a host of
other consumer goods You buy food and gas and clothes
and electronic toothbrushes and Christmas tree shaped pillows for holiday
gifts and or Arbor Day decorations You know stuff like
that Some of the money you spend on this stuff
eventually goes toe workers at the companies who make those
products These workers then spend that cash on other stuff
and so on It's the economic circle of life all
right well that consumer spending cycle is what represents two
thirds of the economy something like nine trillion dollars a
year So the spending on consumer goods is crucial Economists
and policymakers need a way to track all that spending
It allows them to see how things are going and
to make predictions about overall economic growth Enter the P
C E or personal consumption expenditure Tracker Here It's the
fancy name for all that money you spend on knickknacks
and doodads and services to like you know consumer spending
includes stuff like oil changes You get for your car
and doctor visits where you turn your head and cough
and you know a back hair Electrolysis Personal consumption expenditure
is the official stat for measuring consumer spending Any economy
in the US The figure is compiled monthly by the
Department of Commerce Will the same report also includes details
on personal income and disposable personal income Two measures of
you know how much money people make right So the
government looks at how much smooshy love is paying you
and how much of that money your spending while the
PC also helps to track changes in price's Along with
the income and spending data the government issues what's called
the P C E price index It shows how much
prices for consumer goods have changed during that period Well
the index measures retail inflation basically or deflation of prices
go down smooshy love overproduced heart pillows ahead of Valentine's
Day Now it's March and they've got a warehouse full
of them Then they drop prices Just a blowout inventory
Well that drop in prices would show up in the
PC price index It's mushy Love is now facing lower
revenue for this month Own theory Maybe they cut your
salary which then shows up in the government report in
the personal income section Now you have less money to
buy other goods and you spend less on clothes and
back hair electrolysis and well that lower spending shows up
in the PC east at the Now We gotta go
find someone else to tweeze are back hair with a 00:03:12.688 --> [endTime] discount Get out