What Is the Average Propensity to Consume?

Jim B.
Jim B.
Man climbing a rope
Man climbing a rope

The term "average propensity to consume" describes the percentage of household income dedicated to purchasing both services and goods in a specific time period. This amount is the opposite of the average propensity to save, and the two totals when added together will have a sum of one. To determine an individual's or family's average propensity to consume (also referred to as APC), the sum of money applied to consumption over a proscribed time period should be divided by the total income earned during that same time period. High levels of APC throughout society are better for the economy as a whole even though they detract from the savings of the individuals within the society.

Every person who earns money has to make daily decisions on how much of that money should be spent and how much should be saved. These individual decisions have an effect on the economy as a whole, which depends on solid spending levels for its health. Thus, the average propensity to consume can be used as an important indicator for economic health as well as a specific look at the spending habits of individual households.

As an example of how the average propensity to consume is calculated, imagine that a household earns $10,000 US Dollars (USD), after taxes, in a single month. That family proceeds to take $7,000 USD and spend it on food, clothing, entertainment, and the like throughout the month. In this case, the APC would be the consumption of $7,000 USD divided by the income of $10,000 USD, yielding a quotient of .7. This means that the company spent 70 percent of its earnings in that particular month.

By contrast, the inverse of the average propensity to consume is the average propensity to save, or APS. Using the example above, the savings of $3,000 USD would be divided by the $10,000 USD income, producing an APS of 0.3. As the example shows, adding the APC of 0.7 and the APC of 0.3 yields a sum of one.

Economists keep a close watch on the average propensity to consume on an economy-wide basis, since the levels of APC are often directly proportional to the strength of an economy as a whole. People spending more of their earnings means more income for businesses, who can then afford to produce more goods and hire more people. Still, on an individual level, people who take care to save money wisely will generally have better long-term financial success than those people who spend indiscriminately.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?
    • Man climbing a rope
      Man climbing a rope