Question

The increase (or decrease) in income has an impact on the economy. Explain what happens to consumption when income changes. Apply this on country or state behavior in their consumption habits.

Answer 1

Increase in income is usually associated with an increase in the consumption as well as an increase in the savings. A part of the income increase is used in buying goods and services which means spending. The other part is saved or invested. Marginal propensity to consume measures the part which is consumed when income is increased and marginal propensity to save measures the part which is saved when income is increased.

When the income level is very low for a country or a region, the increasedpart of the income is mostly consumed and only a little is saved. Gradually when the income level is increased and reaches a higher level, most of the increase in the income is saved and the remaining is consumed. This indicates that the marginal propensity to consume should be very high for low income countries and should be low for high income countries.