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

CBSE 2016 Class 12 Economics Delhi Set-1

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Question : 7 of 18

Marks: +1, -0

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.
$\;\text " (ii) "\; {\MPC}=∆ {\C} \/ ∆ {\Y}$	${\APC}= {\C} \/ {\Y}$
(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 : $\; {\APC}= {\C} \/ {\Y}=4500 \/$ $5000=0.90 \;\text " or "\; 90 \%$

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