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Marginal Propensity To Save

Updated on January 30, 2024
Article byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Marginal Propensity To Save (MPS)?

The marginal propensity to save (MPS) refers to the percentage of total income or an income increment consumers choose to save rather than spend on goods and services. It is a Keynesian economics concept that is used to determine how savings and income changes interact with each other.

Marginal Propensity To Save

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Savings and consumption are dependent on each other. It is assumed that increased income will result in higher MPS. As a result, it highlights the crucial factors connected to spending patterns in a household. MPS also plays a significant role in the determination of multiplier effects. In addition, in the case of individuals, it shows the level of savings.

Key Takeaways

  • The marginal propensity to save is a Keynesian economics concept that refers to the percentage of total income or an increase in income consumers choose to save rather than spend on goods and services. It is used to determine how savings and income changes interact.
  • Saving Function” or “Propensity to save” displays how much money households save when their income is at a certain level for a certain amount of time.
  • A person’s ability to meet their needs increases along with their income, creating a larger MPS.
  • MPS is calculated by (Change in Savings)/ (change in the level of income).

Marginal Propensity To Save Explained

The marginal propensity to save represents the share of additional disposable income used for saving. Therefore, a change in savings brought on by a change in disposable income is the MPS. It demonstrates how much a person is willing to set aside when they obtain more money. For instance, if MPS is 2%, the person is prepared to set aside $ 2 for every 100$ they make. Savings can vary with an individual’s income. Thus higher the income, the higher their MPS will be.

Savings is the difference between Income and spending (consumption expenditure). The functional relationship between savings and national income is called the saving function. Thus “saving function” or “propensity to save” displays how much money households save when their income is at a certain level for a certain amount of time. It displays the various savings rates at various income levels in an economy. Propensities to save are of two types: Average Propensity to Save (APS) and Marginal Propensity to Save (MPS).

The MPS calculates how much money is made or lost in the economy. Leakage is the term used to describe the portion of income not spent on purchasing goods and services to reinvest in the economy. A person’s ability to meet their needs increases along with their income, creating a larger MPS. In other words, a person’s likelihood of spending an additional dollar decreases as their wealth increases.

MPS is a significant factor in determining the multiplier impact. Any change in the market value of commodities produced inside a nation’s boundaries that results from a change in an independent variable, like an increase in government spending, is dealt with by the multiplier effect. Any modification to government spending will raise disposable income, which will increase consumption. Consumption will rise as a result of higher disposable income for other industries, which fuels more consumption.

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Formula

The formula used for calculating MPS is as follows:

MPS Formula = Change in the rate of Savings / Change in the Level of Income

MPS = ΔSY

Where,

  • ΔS = the changes in savings and
  • ΔY = the changes in income

Calculation Example

Dan is a business owner who saw good revenue in 2022. His savings increased from 20,000 to 50,000 when his income rose from 100,000 to 200,000. Dan’s MPS will be calculated as follows :

MPS = ΔSY

= (50000 – 20000)/((200,000-100,000)

= 0.3

Graph

Let’s check out this graph to get a better idea:

MPS Graph

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The above graph is a simple depiction of the saving function. It shows that as income increases, the saving rate also increases. The breakeven point is where the savings are zero, and the area below the point is the period where no savings happen. Y and S are representatives of income and savings, respectively.

Marginal Propensity To Save And Marginal Propensity To Consume 

Here are the key differences between them:

Key pointsMarginal propensity to save(MPS)Marginal propensity to consume (MPC) 
Meaning The marginal propensity to save is defined as the ratio of changes in saving to changes in total income.  The marginal propensity to consume demonstrates that when income rises, consumption also rises in parallel with the rise. In other words, the ratio of the change in saving to the change in income is referred to as the marginal propensity to save. 
PurposeThe MPS measures how likely someone is to save money instead of spending it. When compared to the additional revenue accessible to a population, it explicitly refers to the amount saved. It can apply to a single person, a whole family, a community, or an entire nation. This measures consumer purchasing power and the general economic health of a population, nation, market, etc. It is crucial for general economics. 
Influencing factorsLevels of Income, Income’s diminishing marginal utility (as income rises, the marginal inclination to consume more decreases), and Personal preferences (Young people tend to believe in spending more, while older people tend to believe in saving more.) are all factors that influence MPS. Higher interest rates, Consumer Perceptions of the economy, and consumer income level influence MPC. 
FormulaΔS/ΔY Where ΔS= the changes in savings and ΔY= the changes in income  ΔC/ΔY, Where ΔC is the changes in consumption, and ΔY is the change in income.

Frequently Asked Questions (FAQs)

1. Can marginal propensity to save be negative?

The MPS is defined as the ratio of additional income to additional savings. There is a positive correlation between saving and income and hence that definition. Calculating the MPC is simple. It can be calculated by dividing the observed change in savings by the changes in Income: MPS = ΔS/ΔY. Where S = savings and Y = income.
The MPS value can never be negative. It fluctuates between 0 and 1.

2. Can the marginal propensity to save be zero?

Yes, the value is often in the ranges of zero and 1. The fact that MPS is to be estimated requires a change in the level of income to witness a change in the percentage of savings. It cannot be less than zero.

3. What is the relation between the Marginal Propensity to Save and the Marginal Propensity to Consume?

MPC and MPS are inversely correlated; When MPC rises, MPS falls, and when MPC falls, MPS rises.

This has been a guide to what is Marginal Propensity To Save (MPS). We explain its formula, calculation, & comparison with marginal propensity to consume. You can learn more about it from the following articles –

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