The marginal propensity to consume (MPC) measures the portion of each additional unit of income that people spend on goods and services instead of saving it. It shows how consumer spending changes when income increases or decreases.

Formula: MPC = Change in consumption / Change in national income = ΔC / ΔY

Key features:

• The MPC is a major factor in determining the multipler effect; a higher MPC leads to a larger multiplier because more money stays in circulation.
• The value of MPC is always between 0 and 1.
• The sum of MPC and the marginal propensity to save (MPS) is always 1, as extra income must either be spent or saved.
• The assumption that MPC is less than 1 ensures that each round of economic spending becomes smaller, which helps keep the economy stable.
• Changes in the MPC can indicate shifts in consumer confidence; for example, a lower MPC may make expansionary fiscal policy less effective.