Average propensity to consume (APC) (as well as the marginal propensity to consume) is a concept developed by John Maynard Keynes to analyze the consumption function, which is a formula where total consumption expenditures (C) of a household consist of autonomous consumption (Ca) and income (Y) (or disposable income (Yd)) multiplied by marginal propensity to consume (c1 or MPC).
According to Keynes, the individual's real income determines saving and consumption decisions.
The average propensity to consume is referred to as the percentage of income spent on goods and services.
This is caused by autonomous consumption as everyone needs to eat and get dressed, so they buy a certain amount of food and clothes or pay rent, they all spend some amount of money on these necessities.
But they only need to spend larger amount of their income on consumption because they have less money available.
Average propensity to consume is not as significant as the marginal propensity to consume (MPC) which represents an additional change in consumer spending as a result of an additional change in household income per monetary unit [4] and it is calculated as derivative of consumption function with respect to income (ratio of change in consumption to change in income).
[6] Graphically is APC represented by the slope of consumption function which starts from the origin (it holds for the long run: C=cY, Ca=0).
[7] This means that the entire income of a household must be saved or spent.
With increasing income households can save more (APC is decreasing).
APC>MPC holds in the short run for positive income.
(Mathematically from the consumption function: C=cY, after dividing it by income we get APC=(cY)/Y=c=MPC.)
Keynesian theory of APC, where APC>MPC, empirically works only in the short term, because it would predict “secular stagnation” (infinity long depression) in the long run, which did not occur.
This and the Kuznets riddle were the reasons for further development of consumption function.
One of the first explanations, which was wrongly almost forgotten, was provided by Duesenberry, who built on the findings of social psychology.
The two best-known explanations were provided in the 1950s by Modigliani and Friedman, who built on the results of Irving Fisher's theory of intertemporal consumer choice.