What is the average propensity to consume?

Definition of Average Propensity to Consume

The Average Propensity to Consume (APC) is a ratio that measures the portion of a household’s income spent on goods and services as opposed to saving. The average propensity to consume is a benchmark for economists monitoring spending patterns and national spending behavior. Information on the average propensity to consume can also be useful for individuals looking to better understand their expenditures.

How Does the Average Propensity to Consume Work?

Income can either be spent or saved. Each time you receive income, you have to decide how much of that income you will save and how much you will spend. There are many ways to set a household budget that can help you make these decisions. However, to calculate the average propensity to consume, you simply add up all your expenses and divide them by your available income.

Average Propensity to Consume vs. Average Propensity to Save

The average propensity to consume and the average propensity to save work together – if you do more of one, you will do less of the other. The average propensity to save (APS) is the ratio of savings to available income. To calculate the average propensity to save:

What Does the Average Propensity to Consume Mean for You?

When consumers spend their money, it stimulates the economy. An increase in demand for goods and services means increased sales, companies earning profits, and greater job opportunities. Conversely, when the average propensity to consume decreases at the national level, it means that consumers are spending less – which can negatively affect the economy due to companies losing profits and closing down, resulting in fewer workers being employed.

The average consumption of income is a ratio that measures the portion of a household’s income spent on goods and services rather than saved. Average consumption of income is important information for financial and economic reporting. An individual can also use this concept to understand their spending ratio to income and make better financial decisions for themselves and their families.

Source: https://www.thebalancemoney.com/what-is-average-propensity-to-consume-5212761