What is marginal propensity to save?
MPS, also known as the marginal propensity to save, is a proportion that a consumer saves when there is an income raise instead of spending for goods or services. In other words, a consumer tends to save a portion of each dollar of his income instead of spending. In Keynesian macroeconomic theory, MPS is a component where the calculation is the change in savings divided by the change in income.
MPS complements the marginal propensity to consume, which is also known as MPC. When we say complement, it is something that completes or adds to something.
If we plot MPS on a chart, we will see a sloped line where the change in savings is on the horizontal x-axis while the plot in the change in income is on the vertical y-axis.
Let’s talk about Keynesian economics.
In 1930, a British economist named John Maynard Keynes wanted to understand what happened during the Great Depression and why it happened. This yearning resulted in the birth of Keynesian economics, which is a macroeconomic theory. This theory is about the total economic consumption that goes with output effects, employment, and inflation. People consider this an approach that focuses on demand and the economic changes in the short run. It is also a pioneer in studying economic behavior and individual incentive-based market separately. This theory’s basis is from a massive study on the aggregates of national economic variables and constructs.
More on marginal propensity to save
We can say that a marginal propensity to save is different from one income level to another, meaning, the higher the income, the higher the marginal propensity to save. To determine a Keynesian multiplier, MPS can help describe either the effect of raised investment or government consumption that acts as an economic stimulus.
Let’s site an example of marginal propensity to save
Let’s say Christian is an architect who works for a design-build company. He received a bonus that amounts to $800 because his boss got a new client and gratitude for his hard work. It is just a bonus and is not constant in his monthly income, meaning Christian has $800 more than his regular salary. He decided to buy his girlfriend a necklace that amounts to $600, and he saves $200. That $800 bonus is now the marginal increase or change in income, and $200 is the change in savings. His marginal propensity to save is now 0.25. How did we get that computation? We divided the $200 change in savings by the $800 change in income.
Now, the marginal propensity to consume is the effect of change in income to purchasing levels. Here, Christian spent $600 for a necklace from his $800 bonus. His marginal propensity to consume is now 0.75 after dividing $600 by $800.
If we add both the MPS and MPC, it should always be equal to 1, hence our description that MPS complements MPC. Christian’s MPS being 0.25 added to his MPC, which is 0.75, is equal to 1.
