If income increases £10, in certain circumstances, they may increase spending by £11 – they finance this extra spending by borrowing. It is possible that consumers could have a marginal propensity to consume of greater than.
Marginal propensity to consume greater than one
expect unemployment/recession) then they will tend to delay spending decisions and there will be a low MPC. If confidence is high, this will encourage people to spend. A higher interest rate may encourage saving rather than consumption however, the effect is fairly limited because higher interest rates also increase income from saving, reducing the need to save. However, if they gain a permanent increase in income, they may have greater confidence to spend it. If people receive a bonus, then they may be more inclined to save this temporary rise in income. However, at higher income levels, people tend to have a greater preference to save because they have most goods they need already. At low-income levels, an increase in income is likely to see a high marginal propensity to consume this is because people on low incomes have many goods/services they need to buy. The average propensity to consume = consumption / income Factors that determine the marginal propensity to consume (MPC) The marginal propensity to consume can also be shown by the slope of the consumption function: The marginal propensity to consume measures the change in consumption/change in disposable income The MPC will invariably be between 0 and 1. For example, if an individual gains an extra £10, and spends £7.50, then the marginal propensity to consume will be £7.5/10 = 0.75.The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.
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