Definition
The Marginal Propensity to Save (MPS) is an economic term that refers to the proportion of an additional income that an individual or a household chooses to save rather than spend. It reflects changes in savings behavior in response to changes in income levels. The higher the MPS, the more individuals or households are expected to save as income increases.
Key Takeaways
- Marginal Propensity to Save (MPS) is an economic term detailing the proportion of an additional income that an individual chooses to save rather than spend.
- MPS provides insights into an individual’s saving habits, helping in the planning of economic policies. Higher MPS indicates that people will save more even with additional income, which could slow economic growth in the short term.
- It is the direct opposite of the Marginal Propensity to Consume (MPC). If you know the MPC, you can easily determine the MPS by subtracting the MPC from 1. For instance, if the MPC is 0.6, the MPS would be 0.4.
Importance
The finance term Marginal Propensity To Save (MPS) is important because it refers to the proportion of an additional income that an individual decides to save rather than spend.
It plays a crucial role in various economic models and predictions as it helps to analyze how changes in income affect saving habits.
Economists use MPS to forecast how changes in national income will impact the levels of national savings.
A higher MPS indicates that consumers are more likely to save income rather than spend it, suggesting conservative financial behavior.
This measure is instrumental in formulating fiscal and monetary policies by providing insights into consumer behavior during different economic cycles.
Explanation
The Marginal Propensity to Save (MPS) is an economic term used to gauge how savings habits may influence the broader macroeconomic environment. In essence, it measures and predicts how much of each additional dollar of income earned will be set aside and saved. The MPS is a valuable tool through which economists, policymakers, and businesses can forecast changes in a population’s spending and saving habits.
In this sense, it helps these entities assess whether individuals are more likely to save or spend in response to economic shifts and income changes. Further, the MPS is crucial in formulating economic policies. If an economy’s MPS is high, it signals that the citizens are prone to saving and hence, are likely to have a lower spending rate.
This could potentially stunt economic growth as consumer spending is a significant driver of economic activity. Conversely, a lower MPS signifies that individuals are more likely to spend extra income, which could stimulate economic growth. Therefore, understanding MPS aids policymakers in aligning their fiscal policies in a way that encourages a balance between spending and saving, hence maintaining economic stability.
Examples of Marginal Propensity To Save
Retirement Savings: An individual may decide to increase the amount they save each time they receive a raise or bonus at work. If a person gets a bonus of $1000 and decides to save $200 of it, their marginal propensity to save is2 or 20%.
College Savings: A family might choose to save a certain percentage of all extra income they receive toward their children’s college fund. If they receive an inheritance of $5000 and choose to put $1000 of it into the college fund, this family’s marginal propensity to save is2 or 20%.
Emergency Savings: During a period of economic instability or uncertainty, people might increase their savings efforts to buffer against potential future income loss. For instance, an individual who fears they may lose their job due to the pandemic might decide to save 30% of their stimulus check, indicating a marginal propensity to save of3 or 30%.
Frequently Asked Questions about Marginal Propensity To Save
Q1: What is the definition of Marginal Propensity To Save?
The marginal propensity to save (MPS) is an economic concept that represents the proportion of an increment in income that a consumer saves rather than uses for consumption.
Q2: How do you calculate the Marginal Propensity To Save?
Marginal Propensity To Save is calculated by dividing the change in savings by the change in income. The formula is MPS = ΔS/ΔY, where ΔS is change in saving and ΔY is change in income.
Q3: What does a high Marginal Propensity To Save indicate?
A high marginal propensity to save indicates that individuals are more likely to save any additional income they receive instead of spending it.
Q4: What is the relationship between Marginal Propensity To Save and Marginal Propensity to Consume?
The sum of Marginal Propensity To Save and Marginal Propensity to Consume always equals to one. If an individual’s MPS is high, their MPC is low, and vice versa.
Q5: How does Marginal Propensity To Save affect the economy?
Higher Marginal Propensity To Save can lead to a decrease in demand, as less money is being spent in the economy. This can slow down economic growth in the short run. However, in the long run, higher MPS can lead to increased investment and economic growth.
Related Entrepreneurship Terms
- Disposable Income
- Savings Rate
- Income Elasticity of Savings
- Macro Economics
- Multiplier Effect
Sources for More Information
- Investopedia: An online resource dedicated to investing and finance education along with market news.
- Corporate Finance Institute (CFI): A professional training and certification provider specializing in financial analysis and modeling.
- Economics Help: An independent economic website focused on helping students understand and study economics.
- Khan Academy: A nonprofit organization offering free lessons in math, science, and humanities from kindergarten to the early stages of college.
