PC, MPC, consumption function nd th siz of multiplir - Essay Example

It is clcultd s th chng in consumption xpnditur, DC, dividd by th chng in disposbl incom, DYD, tht brought it bout. In othr words, th mrginl propnsity to consum is msurd s th rtio of th chng in consumption to th chng in incom, thus giving us figur btwn 0 nd 1. Th MPC cn b mor thn on if th subjct borrowd mony to finnc xpnditurs highr thn thir incom. On minus th MPC quls th mrginl propnsity to sv. It is ffctd by fctors such s th prviling intrst rt nd th gnrl lvl of consumr surplus tht cn b drivd from purchsing.

1 Totling, conomists oftn spk of th mrginl propnsity to sv (MPS), which is th frction of xtr incom tht popl sv. Givn tht popl ithr sv or consum dditionl incom, th sum of th mrginl propnsity to sv nd th mrginl propnsity to consum should qul on. Th vlu of th mrginl propnsity to consum should b grtr thn zro nd lss thn on. vlu of zro would indict tht non of dditionl incom would b spnt; ll would b svd. vlu grtr thn on would mn tht if incom incrsd by $1.00, consumption would go up by mor thn dollr, which would b unusul bhvior.

For som popl MPC of 1 is rsonbl, mning tht thy spnd vry dditionl dollr thy gt, but this is not tru for ll popl, so if w wnt consumption function tht tlls us wht popl on th vrg do, vlu lss thn on is rsonbl. vrg Propnsity to consum is th. Shift in th Consumption FunctionTh consumption - incom rltionship chngs whn othr fctors thn incom chng - for xmpl ris in intrst rts or fll in consumr confidnc might ld to fll in consumption spnding t ch lvl of incom. ris in houshold wlth or ris in consumr's xpcttions might ld to n incrsd lvl of consumr dmnd t ch incom lvl (n upwrd shift in th consumption curv).

Th min diffrnc btwn PC nd MPC lis in th fct tht PC is th vrg consumption t ch lvl of incom, mnwhil, MPC is th chng in consumption rsulting from chng in incom. Th multiplir is th mount by which chng in utonomous xpnditur is mgnifid or multiplid to dtrmin th chng in quilibrium xpnditur. Th multiplir quls 1/(1 - MPC) or, ltrntivly, 1/MPS. Th siz of th multiplir dpnds on th mrginl propnsity to consum: th highr th mrginl propnsity to consum, th highr th multiplir. highr mrginl propnsity to consum mns tht lrgr shr of ny incrs in incoms is thn spnt on consumption.

highr mrginl propnsity to consum mns tht th ggrgt dmnd lin--th lin rprsnting totl spnding s function of incom--is stpr. Th MPC is dirctly (positivly) rltd to th siz of th multiplir. Th MPS is invrsly (ngtivly) rltd to th siz of th multiplir. stpr ggrgt dmnd lin mns tht vn smll upwrd (or downwrd) shift in it will hv lrg ffct on whr it crosss th 45 dgr incom-xpnditur lin, nd thus lrg ffct on ntionl incom. This is wht is clld lrg vlu of th multiplir. Th xggrtd chng tks plc bcus chng in production (such s wht occurs whn invstmnt xpnditurs purchs cpitl goods) gnrts incom, which thn inducs consumption.

Howvr, th rsulting consumption is lso n xpnditur on production, which gnrts mor incom, which inducs mor consumption. Th nxt round of consumption lso triggrs n ltr in production, which gnrts vn mor incom, nd