An Analytical Study of Consumption and Saving Functions: Interlinkages of MPC, MPS, APC, and APS in Economic Theory and Practice

Abstract

This study presents an analytical examination of the consumption and saving functions, focusing on the interlinkages between the Marginal Propensity to Consume (MPC), Marginal Propensity to Save (MPS), Average Propensity to Consume (APC), and Average Propensity to Save (APS) in both economic theory and practice. Grounded in the Keynesian framework and enriched by modern theories such as the life-cycle and permanent income hypotheses, the research explores how households allocate income between consumption and saving, and how these allocations respond to changes in income levels. The analysis confirms the fundamental identities MPC + MPS = 1 and APC + APS = 1, derived from the exhaustive allocation of disposable income. The study discusses how these relationships are influenced by factors including income distribution, consumer confidence, access to credit, cultural norms, and macroeconomic conditions. Empirical insights from the literature highlight significant variations across socio-economic groups, countries, and time periods, as well as the impact of uncertainty and behavioral biases. Findings underscore the policy relevance of these measures: high MPC values suggest greater short-term multiplier effects from fiscal stimulus, while high MPS and APS values indicate stronger long-term investment potential. The research emphasizes the need for policymakers to strike a balance between promoting consumption to support aggregate demand and fostering savings to finance sustainable growth. Overall, the study reaffirms the enduring significance of these propensities as tools for understanding and guiding economic behavior in an evolving global context.