The standard formula for calculating the marginal propensity to consume, or MPC, is marginal consumption divided by marginal income. This is sometimes expressed as MPC = mC ÷ mY. In layman's terminology, this means MPC is equal to the percentage of new income spent on consumption rather than saved.

For example, if Tom receives $1 in new disposable income and spends 75 cents, his MPC is 0.75 or 75%. If all new income is either spent or saved, Tom must therefore also have a marginal propensity to save, or MPS, of 0.25 or 25%.

Origins of Marginal Propensity to Consume

Famed British economist John Maynard Keynes formally introduced the concept of the MPC in his "The General Theory of Employment, Interest, and Money" in 1936. Keynes argued that all new income must either be spent, as with consumption, or invested, as with savings. This is written as Y = C + I. Thus, new income can marginally be expressed as mY = mC + mI, although it is more commonly written as dY = dC + dI. The portion of new income spent on consumer goods is equal to mC ÷ mY.

In terms of significance, there might not be a more underappreciated part of Keynes' theory than MPC. This is because Keynes' famous investment multiplier assumes that MPC has a strict positive correlation with the increased level of investment activity.

Practical Calculations of MPC

Despite the relative simplicity of Keynes' argument about identifying MPC, macroeconomists have not been able to develop a universally accepted method of measuring MPC in the real economy. Much of the problem is that new income is considered a cause and an effect on the relationship between consumption, investment and new economic activity, which generates new income.