Question

Differentiate between marginal propensity to consume and marginal propensity to save diagrammatically.

Hint:

Remember that since MPC + MPS = 1, the two values are complements. A high MPC implies a low MPS.

Answer 1

Step 1: Definitions:
\begin{itemize} \item Marginal Propensity to Consume (MPC): It is the ratio of the change in consumption expenditure (\(\Delta C\)) to the change in income (\(\Delta Y\)). It represents the proportion of additional income that is spent on consumption. \(MPC = \Delta C / \Delta Y\). \item Marginal Propensity to Save (MPS): It is the ratio of the change in saving (\(\Delta S\)) to the change in income (\(\Delta Y\)). It represents the proportion of additional income that is saved. \(MPS = \Delta S / \Delta Y\). \end{itemize} The fundamental relationship is that any additional income is either consumed or saved, so MPC + MPS = 1.

Step 2: Diagrammatic Differentiation:
We can show the difference using the consumption curve and the saving curve. MPC is the slope of the consumption curve, and MPS is the slope of the saving curve. \begin{center} \begin{tikzpicture}[scale=0.9] % Upper panel for Consumption \begin{scope}[yshift=5.5cm] \draw[->] (0,0) -- (7,0) node[right] {Income (Y)}; \draw[->] (0,0) -- (0,5) node[above] {Consumption (C)}; \draw[thick, dashed] (0,0) -- (5,5) node[above] {\(Y=C\) (45° Line)}; \draw[thick, color=blue] (0,1) -- (6,4) node[right] {C = f(Y)}; % Triangle for MPC \draw[thick] (2,2) -- (4,2) -- (4,3); \node at (3, 1.8) {\(\Delta Y\)}; \node at (4.3, 2.5) {\(\Delta C\)}; \node at (2.5, 3.5) {Slope = MPC = \(\frac{\Delta C}{\Delta Y}\)}; \end{scope} % Lower panel for Saving \begin{scope}[yshift=0cm] \draw[->] (0,0) -- (7,0) node[right] {Income (Y)}; \draw[->] (0,-2) -- (0,3) node[above] {Saving (S)}; \draw[thick, color=red] (0,-1) -- (6,2) node[right] {S = f(Y)}; % Triangle for MPS \draw[thick] (2,0) -- (4,0) -- (4,1); \node at (3, -0.2) {\(\Delta Y\)}; \node at (4.3, 0.5) {\(\Delta S\)}; \node at (2.5, 2) {Slope = MPS = \(\frac{\Delta S}{\Delta Y}\)}; \end{scope} \end{tikzpicture} \end{center}

Step 3: Explanation of the Diagram:
\begin{itemize} \item In the upper panel, the consumption curve (C) shows the relationship between income and consumption. The slope of this curve (\(\Delta C / \Delta Y\)) represents the MPC. Since the curve is a straight line, the MPC is constant. \item In the lower panel, the saving curve (S) is derived from the consumption curve. The slope of this curve (\(\Delta S / \Delta Y\)) represents the MPS. \item The slopes of the two curves are different, but their sum is always one. If the consumption curve is steep (high MPC), the saving curve will be relatively flat (low MPS), and vice versa. \end{itemize}

Step 4: Final Answer:
MPC and MPS are differentiated by what they measure: the proportion of additional income that is consumed versus saved. Diagrammatically, MPC is the slope of the consumption curve, while MPS is the slope of the saving curve.