Marginal Propensity to Save: Formula & Relationship to MPC

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• 0:00 Marginal Property to Save
• 0:42 Foundational Definitions
• 1:22 Graph, Examples, &…
• 2:42 Determining Factors
• 3:54 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson we will learn what happens when we receive extra income. Specifically, we will look at marginal propensity to save and the formula used to calculate it. The lesson will end with a summary and a quiz to test your knowledge.

Marginal Property to Save

Have you ever wondered what you might do with a big bonus? What would you buy? Would you save any of it? Many of us rely on a paycheck that pretty much falls within the same range each time. This helps us plan what we will do with our paychecks, such as paying bills, and helps us to develop a budget.

But, suppose one month you look at your paycheck and notice you got a \$500 bonus! What you do next with that money is the focus of this lesson. You see, if you decide to save any portion of it, then that portion is known as marginal propensity to save (MPS). In this lesson we will learn more about this term and gain a better understanding of how to calculate MPS.

Foundational Definitions

Before we go any further, let's take a moment to learn some basic definitions. First, there is marginal propensity to save, which is the portion of disposable income that is saved instead of used to purchase goods and services. Disposable income is the money we have after taxes that we can choose to spend or save. Basically, if you receive extra money, that amount that you put in your savings account would be defined as your marginal propensity to save.

Marginal propensity to consume is the exact opposite, as it is the portion of extra money that is consumed on goods and services. It is the money that you decide not to save and instead use to perhaps purchase a new jacket you have been eyeing.

Graph, Examples, & Calculations

Here is a graph that shows the slope of the line when illustrating MPS. As you will notice, the more income an individual has, the more likely they are to save. We'll soon discuss why that happens.

We know that the marginal propensity to save is the amount of extra money we decide to save instead of using to consume goods and services, but how do we calculate this? Let's take a look at the formula and an example to help further explain MPS.

Let's imagine that your company gave all employees a \$700 Christmas bonus. After a short discussion with your spouse, you decide that you need a new dishwasher, which will cost \$500. The other \$200 you decide to put into your savings account. Using this information, let's calculate MPS, the marginal propensity to save.

MPS = change in saving / change in income

MPS = \$200 / \$700 = .29

Now, suppose you want to figure out what the portion is that you decided to spend on your new dishwasher. This is known as the marginal propensity to consume (MPC) and is calculated as follows:

MPC = change in consumption / change in income

MPC = \$500 / \$700 = .71

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