Question

Give the meaning of propensity to save. Discuss, in brief, the two types of propensities to save.

Accepted Answer

The propensity to save is synchronised with the saving function. This tells the different amounts of savings at the different levels of income. The propensity to save can be represented in the following algebraic expression:

$S = f (Y)$

In this case, Y represents the amount of income. And, S represents the corresponding savings that are made at these levels of income. The saving function slopes towards an upward direction. The savings and incomes are directly proportional to each other. There are two types of propensities to save:

Average propensity to save

Marginal propensity to save

Average propensity to save

The average propensity to save is abbreviated as APS. This variable detects the proportionate amount of income that is saved in an economy. The value of APS is calculated with the help of the following formula:

$A v e r a g e p r o p e n s i t y t o s a v e = \frac{S a v i n g s}{I n c o m e} A P S = \frac{S}{Y}$

The value of APS cannot go beyond one.

The value of APS can become negative due to autonomous consumption.

The value of APS can become zero when an economy reaches the break-even point.

The value of APS increases with the passage of an increase in income.

Marginal propensity to save

The marginal propensity to save is abbreviated as MPS. This variable tells the proportionate amount of income that all households save in an economy. The value of average propensity to save is determined with the help of the following formula:

$M a r g i n a l p r o p e n s i t y t o s a v e = \frac{C h a n g e i n s a v i n g}{C h a n g e i n i n c o m e} M P S = \frac{∆ S}{∆ Y}$

The value of MPS can be any number lying within the range of zero to unity.

Zero value of MPS leads to the consumption of the entire amount of additional income.

The value of MPS can rise along with an increment in income.

Give the meaning of propensity to save. Discuss, in brief, the two types of propensities to save.

Important Questions on Determination of Income and Employment

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