calculation of: average and marginal propensities to save (aps and mps)

The Circular Flow of Income

Imagine the economy as a big pizza 🍕. The crust is the households 🏠, the cheese is the firms 🏭, and the sauce is the money flow 💰. Money moves back and forth like a dance, keeping the pizza delicious and everyone happy.

Key Actors in the Flow

  • 🏠 Households – Provide labour and receive wages.

  • 🏭 Firms – Produce goods and services, pay wages.

  • 💰 Financial Sector – Channels savings into investment.

  • 🌍 Government – Taxes and spends, influencing the flow.

  • 🌐 Foreign Sector – Exports and imports add external income.

The Money Flow

Households give firms their labour and receive wages in return. They spend a part of these wages on goods and services, which goes back to firms. The rest is saved and moves into the financial sector, where it can be lent to firms for investment. Government taxes part of the income and spends it on public goods, while the foreign sector brings in or takes out money through trade.

Saving and Consumption

The amount households keep from their income is called saving (S). The rest is consumption (C). The relationship is:

Income (Y)Consumption (C)Saving (S)
\$Y\$\$C\$\$S = Y - C\$

Propensity to Save

Two important measures help us understand how much people save:

  1. Average Propensity to Save (APS) – the proportion of total income that is saved.

  2. Marginal Propensity to Save (MPS) – the extra amount saved when income rises by a small amount.

Formulas:

APS = \$S/Y\$

MPS = \$\Delta S / \Delta Y\$

Example Calculation

  1. Suppose the economy’s total income is \$Y = £1,000\$ and households save \$S = £200\$.

  2. APS = \$200 / 1,000 = 0.20\$ (or 20%).

  3. Now income rises to \$Y' = £1,100\$ and saving rises to \$S' = £250\$.

  4. ΔY = \$1,100 - 1,000 = 100\$, ΔS = \$250 - 200 = 50\$.

  5. MPS = \$50 / 100 = 0.50\$ (or 50%).

Exam Tips

• Remember that APS + MPC = 1 (MPC = marginal propensity to consume).

• MPS is the slope of the saving function – a straight line if saving is linear.

• When given two points on the saving curve, use ΔS/ΔY to find MPS.

• Check units: both ΔS and ΔY should be in the same currency.

• Use the example above as a quick mental check before writing your answer.

• In multiple‑choice, look for the option that matches the calculated value.

• For essay questions, explain why a higher MPS reduces the multiplier effect.

📈 Good luck – you’ve got this! 🚀