ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Marginal propensity to save (MPS) is an economic measure of how savings change, given a change in income. It is calculated by simply dividing the change in savings by the change in income. A larger MPS indicates that small changes in income lead to large changes in savings, and vice-versa.

Detailed explanation-2: -This calculation is important because MPC is not constant; it varies by income level. Typically, the higher the income, the lower the MPC because as income increases more of a person’s wants and needs become satisfied; as a result, they save more instead.

Detailed explanation-3: -For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. Likewise, it is the fractional decrease in saving that results from a decrease in income.

Detailed explanation-4: -More generally, the slope of the saving function equals the change in personal saving divided by the change in disposable personal income. The ratio of the change in personal saving (S) to the change in disposable personal income (Yd) is the marginal propensity to save (MPS).

Detailed explanation-5: -Marginal propensity to consume (MPC) measures how much more individuals will spend for every additional dollar of income. MPC is calculated as the ratio of marginal consumption to marginal income.