Definition
The marginal propensity to consume (MPC) measures how much of an additional unit of income a household spends on consumption. If a family receives an extra 100 currency units and spends 80 of them, its MPC is 0.8. The remaining fraction, the marginal propensity to save, is the part set aside.
MPC is always between zero and one for an economy as a whole: people rarely spend nothing extra, and rarely spend more than the full increase. It captures the behavioral link between income changes and spending changes.
Why it matters
How it works
When income rises, consumption rises by the MPC times that income change. Because one person's spending is another person's income, the initial change keeps circulating. Each round adds a smaller amount, scaled by the MPC, until the total effect settles.
This is why the multiplier is calculated as one divided by one minus the MPC. An MPC of 0.8 yields a multiplier of five; an MPC of 0.5 yields a multiplier of two. Policymakers therefore target stimulus toward groups likely to spend rather than save it.