MARGINAL PROPENSITY TO SAVE Meaning and
Definition
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Marginal propensity to save (MPS) is an economic term that measures the proportion of an individual or a household's additional income that is saved rather than spent on consumption. It is the percentage change in savings from a change in income.
The MPS reflects the behavior of individuals or households in terms of saving and planning for the future. It indicates how much of an increase in income will be saved instead of being spent on goods and services.
For example, if an individual's income increases by $100 and the marginal propensity to save is 0.25, it means that the person will save $25 ($100 multiplied by 0.25) and spend $75 ($100 minus $25) on consumption.
The MPS is influenced by several factors, including income level, interest rates, and individuals' attitudes towards savings. Higher income earners tend to have a lower MPS, as they have more disposable income and may choose to spend a larger portion of it. Conversely, individuals with lower income levels often have a higher MPS as they have limited resources and may need to save for future expenses.
Understanding the MPS is crucial in economic analysis, as it helps to determine the overall savings habits and the potential impact on aggregate demand and economic growth. It is a key component of the Keynesian consumption function, which examines the relationship between consumption and national income.
