What is the marginal tendency to consume?
The marginal tendency to consume, also known simply as MPC, is an economic theory that measures the relationship between the increase in reward and the consumption of goods and services. The aim is to find out what share of this salary increase will be used for the purchase of consumer products and what share is likely to be saved. Understanding the marginal inclination to consume is important for the process of evaluating consumer habits and determining the impact of these habits on the local or national economy.
One of the simplest ways to understand how the marginal tendency to consume is measured is to consider an example of a household that has recently experienced salaries, resulting in another $ 500 (USD). If the household decides to spend half of this amount per lawn mower and place the rest on a savings account, the marginal tendency to consume is considered 0.5. This number is determined by dividing expenditure for the amount of the total amount received, or $ 250, USD $ 500 distributed.
understanding the marginal inclination for consumers is important for individuals and companies for various reasons. Companies want to encourage consumers to spend more of their earnings, specifically when buying items made by the company. As regards the management of their own resources, companies are also trying to achieve a pleasant balance between what they spend and what they invest in interest accounts or other assets that can be quickly transferred to cash if necessary. As with households, building cash reserves and at the same time use the income to carry out wise purchases for greater financial stability in the long run.
Governments are also considering a marginal tendency to consume in an attempt to manage the national economy. For this reason, the government through its central or federal banks may raise or reduce interest rates as a means of encouragement of companies and households to spend more or more to save, depending on which access is PRO economics considered the most advantageous. By providing incentives for consumers to spend more, the economy can often be raised from a period of recession, as more products sold mean more income that circulates and promote jobs in the economy. At the same time, if the government wishes to slow down the inflation in the economy, incentives to spend and encourage citizens to put more of their additional income in savings than for shopping.