What is Marginal Propensity to Save (MPS)?
The Marginal Propensity to Save (MPS) is a fancy term that measures the portion of income that an individual saves rather than spends on consumption. If your income goes up like the price of a bag of kale, and you decide to stash some away for that rainy day (or future avocado toast), you’re demonstrating your MPS. Formally, it is calculated as:
$$\text{MPS} = \frac{\text{Change in Saving}}{\text{Change in Income}}$$
MPS vs. Marginal Propensity to Consume (MPC)
| Feature | Marginal Propensity to Save (MPS) | Marginal Propensity to Consume (MPC) |
|---|---|---|
| Definition | The fraction of income saved | The fraction of income spent |
| Formula | MPS = ΔS / ΔI | MPC = ΔC / ΔI |
| Relationship | MPS + MPC = 1 | MPS + MPC = 1 |
| Behavioral Aspect | Reluctance to spend | Willingness to spend |
| Income Effect | Higher with increased income levels | Typically lower with increased income |
MPS Example
Let’s say you receive a $1,000 bonus at work 🎉. If you save $400 of this bonus, your MPS would be:
$$\text{MPS} = \frac{400}{1000} = 0.4$$
This means you saved 40% of your bonus instead of splurging it all on that three-week trip to Bali. Although, who wouldn’t want to be blissfully sipping coconut water under a palm tree?
Related Terms
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Keynesian Multiplier: The factor by which an increase in spending will ultimately increase national income. For each dollar increase in spending, the effect could be multiplied due to the changes in income and consumption that can lead to further increases in economic activity.
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Disposable Income: The income available to an individual after taxes and mandatory expenses, giving them the freedom to save or spend.
Diagram of MPS
graph LR;
A[Change in Income] -->|MPS| B[Change in Savings]
Humorous Citations & Fun Facts
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“Money can’t buy happiness, but it can let you save for a rainy day—unless you are the type to spend it all on Wi-Fi.”
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Did you know? The average American saves about 7.4% of their disposable income, so don’t feel too guilty about splurging on that new gadget!😜
Frequently Asked Questions
What is a ‘good’ MPS?
A ‘good’ MPS depends on personal financial goals, but saving high is often encouraged! Just remember, if your MPS is too high, you might miss out on enjoying some of life’s pleasures, like ice cream on a Sunday.
Can MPS predict economic trends?
Yes! If everyone decides to save more when they earn more, it could lead to decreased spending in the economy, possibly resulting in a slowdown.
What happens when MPS is low?
A low MPS might mean people are spending joyfully (or recklessly), potentially fuelling economic growth…or leading to a long-term session of regret while staring at that empty wallet.
References for Further Study
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Books:
- The General Theory of Employment, Interest, and Money by John Maynard Keynes - Dive deep into the roots of Keynesian economics and the relationship between saving and consumption.
- Freakonomics by Steven D. Levitt & Stephen J. Dubner - For a more fun take on economics that often circles back to objectives like MPS.
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Online Resources:
Test Your Knowledge: Marginal Propensity to Save Quiz
Thank you for exploring the marvelous world of saving with us! Remember, saving is not just for stashing away pennies but also for future fun adventures. May your savings bring you joy, not only as numbers in a bank but as endless possibilities! 🌟
