Determination of Income and Employment

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Propensity to Consume: It is an expression which establishes the functional relationship between consumption expenditure(C) & the level of income(Y). The consumption function or propensity to consume is represented by C = f (Y) Or, C = a + bY, where, 'C' stands for Consumption expenditure, 'a' stands for autonomous consumption i.e. the consumption expenditure when the level of income is zero, 'b' for slope of the consumption curve, 'Y' stands for level of income.

The two types of consumption function or propensity to consume are as follows:

1. Marginal Propensity to Consume (MPC): It refers to the ratio of change in consumption (Δ C) to change in income (Δ Y).
             MPC = Δ C / Δ Y
2. Average Propensity to Consume (APC): It refers to the ratio of total consumption (c) to total income (y).
               APC = Δ C / Δ Y