Calculate MPC and solve the consumption function from disposable income, consumer spending, autonomous spending, and MPC inputs as needed.

Use the same currency and time period for all amounts. Signed changes and observed ratios outside 0–1 are allowed; they are not a personal-finance rating.

MPC Formula

The following formula is used to calculate MPC.

MPC = CC / CI
  • MPC is the marginal propensity to consume
  • Where CC is a change in consumption ($)
  • CI is change in disposable income ($)

To calculate MPC, divide the change in consumption by the nonzero change in disposable income.

MPC describes the spending change relative to a disposable-income change over comparable periods; it does not by itself prescribe lifestyle changes.

MPC Definition

MPC stands for marginal propensity to consume. It is the change in consumption divided by the change in disposable income. The linear model C = a + bYd uses b as MPC; the calculator also solves its variables and checks entered values.

How to calculate MPC

The following example is a step-by-step guide on how to calculate MPC.

  • The first step in solving the MPC is to understand what variables need to be known from the formula above. In this case, the variables are the change in consumption (how much extra you spend) and the change in disposable income (income available after taxes and transfers).
  • The next step is to calculate the change in income. This equals new disposable income minus old disposable income, measured over the same period. For this example, we will say the change in income was $10,000.00.
  • Now, we must determine what the change in consumption is. This would be more difficult in a real-world situation. To determine this you can dig into all of the extra purchases made since receiving the increase in income. For these examples, we will assume $5,000.00.
  • Finally, enter all of the information into the formula above. From this we find the MPC to be .50 or 50%. There is no universal good/bad threshold at 50%. The simple spending multiplier 1/(1 − MPC) is available only for 0 ≤ MPC < 1 under a fixed-price model without taxes or imports; MPC = 1 has no finite multiplier.

MPC varies across households and circumstances. Observed ratios outside 0–1 can arise from mismatched periods, changes in borrowing or saving, and other influences; interpret them carefully rather than assigning a personal-finance grade.

FAQ

What is MPC?

MPC is short for marginal propensity to consume and it is a measure of a change in consumption relative to a nonzero change in disposable income.