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Average propensity to consume

The average propensity to consume (APC) is a core concept in macroeconomics, defined as the ratio of total consumption expenditure to total disposable income, expressing the proportion of income that households allocate to spending on goods and services rather than saving.^[1] Introduced by John Maynard Keynes in his 1936 work The General Theory of Employment, Interest, and Money, the APC forms part of the consumption function, which describes how consumption levels respond to changes in income.^[1] Keynes posited a "fundamental psychological law" underlying the APC: as disposable income rises, consumption increases, but by a smaller proportion, leading the APC to decline with higher income levels.^[1] This relationship is captured mathematically as APC = C / Y, where C denotes consumption and Y denotes disposable income, contrasting with the marginal propensity to consume (MPC), which measures the change in consumption per unit change in income (MPC = ΔC / ΔY).^[1] In Keynesian theory, a falling APC contributes to the gap between income and consumption that must be bridged by investment to achieve full employment, influencing effective demand and economic equilibrium.^[1] Empirically, the APC tends to be high in modern economies, reflecting stable consumption patterns. In the United States, for instance, the APC stood at approximately 95.4% in August 2025, derived from personal consumption expenditures equaling about 95.4% of disposable personal income, with the remainder allocated to savings at a rate of 4.6%.^[2] Factors influencing the APC include objective elements such as interest rates, fiscal policy, and expectations of future income, as well as subjective motives like precaution and foresight toward saving.^[1] A high APC amplifies the Keynesian multiplier effect, where initial spending increases lead to larger rises in aggregate income, though fluctuations in the APC can contribute to business cycles and underemployment if not offset by investment or policy interventions.^[1]

Definition and History

Definition

The average propensity to consume (APC) is the fraction of total disposable income that households or an economy allocate to consumption expenditures.^[3] This measure captures the overall share of after-tax income devoted to purchasing goods and services, reflecting broad patterns in spending behavior across different income levels.^[4] Formally, the APC is calculated using the formula:

\text{APC} = \frac{C}{Y_d}

where C denotes aggregate consumption expenditures and Y_d represents total disposable income.^[5] In John Maynard Keynes' foundational work, this ratio is presented as the proportion of income expended on consumption, emphasizing its role in determining economic equilibrium.^[6] As an average measure, the APC provides a snapshot of total consumption relative to total income, differing from marginal concepts that focus on incremental changes.^[7] It is a key component of the consumption function, which posits a systematic relationship between consumption and disposable income, serving as a prerequisite for analyzing how spending influences aggregate demand.^[8]

Historical Context

The concept of the average propensity to consume (APC) was introduced by John Maynard Keynes in his seminal work, The General Theory of Employment, Interest, and Money, published in 1936, where it formed a key component of his analysis of the consumption function relating aggregate consumption to income.^[6] Keynes posited that the APC, defined as the ratio of consumption to income, tends to decline as income rises, implying a stable but diminishing relationship over time that influences overall economic equilibrium.^[6] Early empirical research challenged this theoretical framework, particularly through the work of Simon Kuznets, whose studies of U.S. national income and consumption data from the late 19th and early 20th centuries revealed a puzzling stability in the APC despite substantial long-term increases in per capita income—a phenomenon later termed the "Kuznets riddle" or consumption puzzle.^[9] This empirical observation, detailed in Kuznets' analyses around 1946, suggested that the long-run APC did not fall as Keynes had anticipated, prompting a reevaluation of consumption behavior across economic cycles and highlighting inconsistencies between short-run fluctuations and secular trends.^[9] In response to these inconsistencies, economists in the 1950s developed alternative theories to reconcile short-run and long-run consumption patterns. Franco Modigliani, collaborating with Richard Brumberg, proposed the Life Cycle Hypothesis in a 1954 paper, arguing that individuals plan consumption over their lifetimes to smooth expenditures, which could explain the observed long-term stability of the APC.^[10] Similarly, Milton Friedman advanced the Permanent Income Hypothesis in his 1957 book A Theory of the Consumption Function, positing that consumption responds primarily to expected "permanent" income rather than transitory fluctuations, thereby addressing the Kuznets riddle by stabilizing the long-run APC around a constant proportion of lifetime resources.^[11] These contributions marked a significant evolution in the APC's theoretical foundation, shifting focus toward intertemporal optimization and expectations in consumption decisions.^[11]

Properties of the APC

Decreasing with Rising Income

The average propensity to consume (APC) decreases as income rises primarily because autonomous consumption, which represents essential expenditures independent of income levels, remains fixed while total income grows, thereby reducing the share of income devoted to consumption overall. In the standard Keynesian consumption function, this fixed component ensures that APC = (autonomous consumption / income) + marginal propensity to consume, where the first term diminishes with higher income. John Maynard Keynes highlighted this dynamic through his "fundamental psychological law," noting that individuals increase consumption with rising income but by less than the full amount, as basic needs are met and additional income is directed toward saving rather than spending.^[12]^[8] This decline reflects broader economic intuition: higher-income households allocate a larger proportion of their earnings to savings for future needs, investments, or precaution, leaving a smaller fraction for immediate consumption compared to lower-income households who prioritize necessities. Empirical patterns support this, with wealthier groups exhibiting lower APC due to greater savings rates, often exceeding 30% of income for the top earners versus near-zero for the bottom quintile. This behavior aligns conceptually with Engel's law, which observes that the share of income spent on food—a key consumption category—falls as household income increases, illustrating how consumption patterns shift away from basic goods toward savings or luxuries at higher income levels.^[8]^[13] The decreasing APC has significant implications for income distribution and aggregate demand, particularly in growing economies. Uneven income growth that concentrates gains among high earners exacerbates inequality, as these groups' lower consumption propensities reduce overall household spending; for instance, the rising income share of the top 1% from 8.9% in 1979 to 16.4% in 2018 in the U.S. lowered aggregate demand growth by up to 2% of GDP at its peak. In expanding economies, this trend can dampen demand momentum, as the falling APC curtails the consumption multiplier effect, potentially leading to slower growth unless offset by investment or policy interventions like progressive taxation to redistribute income toward higher-spending lower-income groups.^[13]^[14]

Impossibility of Zero APC

The presence of autonomous consumption in the Keynesian consumption function ensures that the average propensity to consume (APC) cannot reach zero, as individuals and households continue to spend on essential needs even in the absence of current income. Autonomous consumption covers basic requirements like food, housing, and utilities, financed through prior savings, borrowing, or government transfers, preventing total cessation of spending. This fundamental component, denoted as the intercept in the linear consumption function C = a + bY (where a > 0 represents autonomous consumption and b is the marginal propensity to consume), implies that consumption remains positive regardless of income level, thereby maintaining APC above zero.^[1] Theoretically, APC is bounded such that 0 < APC, with no upper limit of 1 in practice, as it can exceed unity in low-income situations where dissaving occurs to sustain consumption beyond available income. In such scenarios, particularly at near-zero income, APC approaches or surpasses 1, reflecting the necessity of meeting subsistence needs. This lower bound underscores the psychological and behavioral propensities outlined in Keynesian theory, where community habits and minimal living standards preclude zero consumption. As income increases, APC declines toward the marginal propensity to consume but stays positive due to the persistent autonomous element.^[4] This non-zero APC has significant policy implications, guaranteeing baseline aggregate demand during recessions and enhancing the role of automatic stabilizers like unemployment benefits. These mechanisms replace lost income for the unemployed, sustaining autonomous consumption and preventing sharper contractions in overall spending, which could otherwise amplify downturns through reduced effective demand. For example, during economic slumps, such benefits help preserve household expenditures on necessities, supporting economic stability without requiring discretionary intervention.^[15] Real-world data from developing economies highlight APC nearing or exceeding 1 at low income levels, illustrating the practical impossibility of zero APC. In low-income countries like Afghanistan, final consumption expenditure has averaged 119.3% of GDP in recent years, driven by reliance on remittances, aid, or borrowing to cover basics amid limited domestic income. Similarly, in many sub-Saharan African nations, household APC often exceeds 90% for the poorest quintiles, as empirical studies confirm subsistence-driven spending patterns that align with Keynesian predictions for underdeveloped contexts.^[16]

Relationships to Other Propensities

Relation to Average Propensity to Save (APS)

The average propensity to consume (APC) and the average propensity to save (APS) form a complementary identity that partitions total income between consumption and saving. The APC, defined as the ratio of consumption expenditure (C) to total income (Y), or APC = C/Y, represents the fraction of income devoted to consumption, while the APS, defined as APS = S/Y where S is saving, captures the fraction allocated to saving. This relationship stems from the fundamental national income accounting identity Y = C + S, which implies that APC + APS = 1.^[12]^[3] Rearranging the identity yields APS = 1 - APC, meaning that any decline in the APC directly corresponds to a rise in the APS. As income levels increase, the tendency for APC to decrease—due to a smaller proportion of additional income being consumed—results in a corresponding increase in APS, reflecting greater saving out of higher incomes. This dynamic underscores how saving emerges as the residual after consumption decisions are made.^[17]^[18] In national accounts, the APS plays a key role in tracking saving rates within GDP breakdowns, where gross domestic saving is calculated as GDP minus total final consumption expenditure, often expressed as a percentage of GDP to gauge resource allocation toward investment and future growth. For instance, if an economy has an APC of 0.8, the APS is 0.2, indicating that 20% of income is saved, which can fund capital formation or be reflected in metrics like the World Bank's gross savings-to-GDP ratio.^[19]^[20]

Relation to Marginal Propensity to Consume (MPC)

The marginal propensity to consume (MPC) measures the incremental change in consumption expenditure resulting from a unit increase in income, formally defined as MPC = \frac{\Delta C}{\Delta Y}, where \Delta C is the change in consumption and \Delta Y is the change in income.^[21] This contrasts with the average propensity to consume (APC), which reflects the overall proportion of total income allocated to consumption.^[21] In Keynesian theory, the MPC is typically assumed to be constant and less than one, indicating that only a fraction of additional income is spent on consumption.^[8] A key relationship between APC and MPC arises in the short run from the structure of the consumption function, where APC exceeds MPC due to the dilutive effect of autonomous consumption.^[21] Autonomous consumption represents spending that occurs independently of current income, such as on basic needs, which inflates the average ratio (APC = \frac{a}{Y} + b, where a > 0 is the autonomous component and b = MPC) but does not affect the marginal response.^[21] As a result, while the APC declines with rising income levels, the MPC remains stable, highlighting the average's sensitivity to fixed baseline expenditures.^[8] In the long run, however, the APC converges toward the MPC as income grows, since the relative weight of autonomous consumption (a/Y) diminishes to near zero.^[21] This convergence suggests that over extended periods, consumption behavior becomes more proportional to income, aligning average and marginal tendencies.^[22] This distinction has significant implications for macroeconomic analysis, particularly in determining the Keynesian multiplier, which amplifies initial changes in spending based on the MPC rather than the APC.^[21] The multiplier effect, calculated as \frac{1}{1 - \text{MPC}}, underscores how marginal consumption drives successive rounds of economic expansion, independent of the broader average propensity.^[21]

Graphical and Analytical Representations

Graphical Representation

The standard graphical representation of the average propensity to consume (APC) in Keynesian economics utilizes a diagram with disposable income (Y) on the horizontal axis and consumption expenditure (C) on the vertical axis. The 45-degree line, originating from the point (0,0), illustrates all points where total income equals total consumption (Y = C), which implies zero saving since saving (S) is the vertical distance between this line and the consumption curve. The consumption function is depicted as a curve C = f(Y), which intersects the vertical axis at a positive value representing autonomous consumption and rises with an initial slope less than unity, reflecting that additional income is partly saved.^[23]^[24] The APC at any given income level Y is visually represented by the slope of a ray extending from the origin (0,0) to the point (Y, C) on the consumption curve, where this slope precisely measures the ratio C/Y. This ray construction highlights the proportional relationship between total consumption and total income at that specific point. As income levels vary, multiple such rays can be drawn to different points along the curve, demonstrating how the APC adjusts with changes in Y.^[25]^[24] The tendency for APC to decrease as income rises is evident in the diagram through progressively flatter rays at higher Y values, indicating a diminishing share of income allocated to consumption. with the ray's endpoint at C providing the exact consumption figure for that level. These varying rays thus convey the income effects on consumption behavior, showing how higher incomes lead to shallower slopes and altered consumption proportions. For comparison, the marginal propensity to consume appears as the slope of the tangent line to the consumption curve at the same point.^[25]^[26]

Derivation from Consumption Function

The Keynesian consumption function posits that aggregate consumption C in an economy depends on autonomous consumption C_a, which occurs independently of income, and induced consumption proportional to disposable income Y, expressed as

C = C_a + cY,

where c represents the marginal propensity to consume (MPC), a constant between 0 and 1.^[12] To derive the average propensity to consume (APC), divide both sides of the consumption function by income Y:

\text{APC} = \frac{C}{Y} = \frac{C_a + cY}{Y} = \frac{C_a}{Y} + c.

This algebraic manipulation reveals that the APC comprises two components: the autonomous consumption ratio \frac{C_a}{Y}, which diminishes as income rises, and the constant MPC c.^[21] The decreasing term \frac{C_a}{Y} explains why the APC typically falls with increasing income levels, assuming C_a > 0; meanwhile, as income approaches infinity (Y \to \infty), the APC asymptotically approaches the MPC value c.^[27] This derivation assumes a linear consumption function with a constant MPC, which simplifies analysis in basic Keynesian models but may not capture all real-world dynamics. Extensions to non-linear forms, such as quadratic specifications where MPC varies with income, yield more complex APC expressions that still generally decline but at varying rates.^[28]

Theoretical Explanations for Behavior

Short-Run versus Long-Run APC

In the short run, the average propensity to consume (APC) exhibits a tendency to decrease with rising income levels, aligning with patterns observed during business cycle fluctuations where consumption responds less than proportionally to temporary income changes. This behavior is evident in cross-sectional household data and cyclical variations, where higher-income periods or groups show lower APC, often fitting Keynesian predictions based on short-term observations.^[29]^[30] In contrast, long-run analysis reveals a more stable APC that does not decline significantly with overall income growth, resolving apparent inconsistencies such as the constant share of consumption in national income over extended periods. Empirical evidence from U.S. time-series data spanning 1879–1938, as analyzed by Kuznets, indicates an APC remaining roughly constant at approximately 0.9, suggesting that over decades, consumption adjusts proportionally to secular income trends.^[30] This stability implies that in the long run, the APC approaches the marginal propensity to consume (MPC), as ongoing permanent income changes drive consumption along a proportional path.^[30] The divergence between short-run and long-run APC stems primarily from the nature of income changes: temporary fluctuations, such as those during economic cycles, elicit muted consumption responses, whereas permanent shifts in income lead to fuller adjustments in spending behavior.^[30] In a pure Keynesian framework, a persistently decreasing APC would elevate the average propensity to save relative to income growth, potentially heightening risks of secular stagnation by outpacing investment demand and fostering chronic demand deficiencies.^[31] As economies mature and transition from volatile growth phases to steadier expansion, saving rates adapt accordingly, contributing to the historical stabilization of APC around 0.9 in developed contexts like the United States.^[30]

Life Cycle Hypothesis

The life cycle hypothesis, developed by economist Franco Modigliani in collaboration with Richard Brumberg, posits that individuals plan their consumption and saving to achieve a relatively stable level of consumption throughout their lifetime, smoothing out fluctuations in income across different life stages.^[10] According to this view, people tend to save a portion of their income during their working years when earnings are typically higher, building up assets to support consumption during retirement when income from work declines. This behavior addresses the Keynesian emphasis on short-run consumption responses to income changes by focusing instead on lifetime resource allocation.^[32] In the aggregate, the model implies that the average propensity to consume remains relatively constant over time because the saving and dissaving patterns of different age cohorts in the population balance out. The overall APC thus depends primarily on the demographic age distribution and factors like life expectancy and retirement duration, rather than on current levels of national income. This framework explains the long-run stability of the APC observed in economic data, as shifts in population structure influence aggregate saving without tying it directly to income fluctuations.^[33] The hypothesis predicts that, in the long run and under conditions of zero economic growth with no intergenerational bequests, the aggregate APC would approach 1, as total lifetime resources are fully consumed over the population's lifespan. Empirical tests of the model using U.S. data from the post-World War II period showed a good fit, with the predicted wealth-to-income ratio of 4 to 5 and a saving rate around 13% aligning closely with observed values during a period of approximately 3% annual growth.^[32]^[33]

Permanent Income Hypothesis

The Permanent Income Hypothesis, proposed by Milton Friedman in 1957, posits that individuals base their consumption decisions on their "permanent income," defined as the long-term average expected income derived from an individual's wealth, skills, and economic environment, rather than on current measured income.^[11] Permanent income represents the stable, anticipated flow of resources over a lifetime, allowing consumers to plan expenditures accordingly.^[11] Under this hypothesis, measured income at any given time consists of permanent income plus transitory components, such as temporary windfalls, losses from illness, or short-term economic fluctuations, which are largely uncorrelated with permanent income.^[11] Consumption, in turn, is primarily a function of permanent income, with individuals allocating a constant fraction of it to spending while saving most transitory income to smooth consumption over time.^[11] This behavior implies that transitory positive shocks lead to higher savings rather than proportional increases in consumption.^[11] The hypothesis has significant implications for the average propensity to consume (APC), which measures total consumption as a share of total income. In the short run, APC appears lower during periods of temporary income increases because consumption rises less than income, as the windfall is mostly saved.^[11] Over the long run, however, APC stabilizes at a constant level equal to the propensity to consume out of permanent income, unaffected by transitory variations.^[11] This framework thus rationalizes observed short-run fluctuations in APC converging toward a stable long-run value.^[11] Friedman's model predicts that short-run consumption exhibits volatility due to income shocks but avoids a secular decline in APC, as consumption aligns with expected long-term resources.^[11] It also aligns with cross-country evidence on consumption smoothing, where households in various economies adjust spending to buffer income fluctuations, maintaining relatively stable consumption patterns relative to permanent income levels.^[34]

Applications and Empirical Evidence

Role in Keynesian Economics

In Keynesian economics, the average propensity to consume (APC) plays a central role in the analysis of aggregate demand and economic equilibrium, as outlined in the consumption function where total consumption is a function of income. John Maynard Keynes posited that APC tends to decline as income rises, based on the psychological law that individuals increase consumption with income but by less than the full amount of the increase, leading to a higher proportion saved at higher income levels. This behavior implies that consumption forms a stable but diminishing share of income, influencing the overall level of economic activity without altering the marginal response to income changes.^[12] The APC connects to the Keynesian multiplier through its relationship with the marginal propensity to consume (MPC), where the output multiplier is given by k = \frac{1}{1 - \text{MPC}}. While the MPC determines the multiplier's size, reflecting the incremental boost to demand from additional income, the APC affects steady-state consumption and income levels by setting the baseline share of income devoted to consumption; a higher APC at lower income levels supports larger equilibrium output in response to autonomous spending changes, such as investment or government expenditure. In the short run, this dynamic amplifies the effects of fiscal policy on aggregate demand, as a high APC ensures that initial increases in spending translate into substantial secondary rounds of consumption, thereby enhancing the overall expansionary impact.^[35] Keynesian policy applications leverage the decreasing APC to design stimuli that elevate the consumption share relative to income, particularly during recessions when income is low and APC is relatively high. For instance, expansionary fiscal measures like government spending or targeted transfers aim to counteract the tendency for APC to fall, thereby sustaining demand and preventing underemployment equilibria. In the IS-LM framework, which extends the basic Keynesian model by incorporating money market equilibrium, the APC influences the position of the IS curve; a higher APC shifts the curve rightward, raising equilibrium income for given interest rates and underscoring its role in determining the scale of output responses to policy shifts.^[36]

Empirical Observations and Criticisms

Empirical studies of the average propensity to consume (APC) reveal distinct patterns between short-run and long-run behaviors. In the short run, APC typically ranges from 0.8 to 0.95 and exhibits a decreasing trend as income rises, reflecting non-proportionality in consumption responses to income fluctuations. For instance, during the U.S. Great Depression, consumer confidence reversals in late 1929 led to a sharply diminished APC in the early 1930s, as households reduced spending amid economic uncertainty and credit constraints. This aligns with time-series analyses showing that short-run marginal propensity to consume (MPC) falls below APC, driven by factors like transitory income shocks.^[37] In contrast, long-run APC remains relatively stable at approximately 0.9 across developed economies, indicating proportionality between consumption and income over extended periods. Post-1950s data from OECD countries support this stability, with consumption-income ratios showing no significant drift despite sustained economic growth, as transitory effects average out and households adjust to permanent income levels. Aggregate evidence from U.S. time series (1869–1938) further confirms that long-run APC holds steady even amid major income expansions.^[38] Panel data analyses provide evidence supporting the life-cycle hypothesis, particularly in aging populations, where dissaving patterns among retirees align with predicted consumption smoothing over lifetimes. Studies using cohort-based datasets show that older households in Europe and the U.S. exhibit higher APC out of wealth as they draw down assets, consistent with life-cycle predictions, though deviations occur due to bequest motives. For the permanent income hypothesis, tax rebate experiments demonstrate limited effects from transitory income; for example, U.S. refund recipients in the early 2000s displayed MPCs of 0.35 to 0.60, with much of the windfall saved rather than spent immediately, validating the hypothesis's emphasis on permanent income.^[39]^[40]^[41] Criticisms of Keynesian consumption theory highlight its prediction of a declining long-run APC leading to secular stagnation, which empirical growth data have largely falsified. Postwar expansions in OECD economies, with stable APC around 0.9, contradict the notion of inevitable demand deficiency from falling propensities, as investment and productivity gains sustained output without chronic underconsumption. Behavioral factors, such as liquidity constraints, further undermine life-cycle and permanent income models by showing that low-wealth households cannot borrow against future income, leading to excess sensitivity of consumption to current income changes—evident in MPC estimates exceeding 0.5 for constrained groups. Recent gaps in APC research include underexplored impacts from the digital economy; post-2020 data indicate consumption resilience during COVID-19, with MPCs from stimulus averaging 0.4–0.6, but shifts toward online spending and remote work have altered patterns without clear long-run APC adjustments as of 2025.^[42]^[43]^[44] Additionally, rising income inequality has mixed empirical effects on APC, with some studies finding no aggregate impact on consumption levels, while others note reduced propensities out of wealth due to concentration among high-asset households with low MPCs (around 0.02 per dollar). COVID-19-induced shifts, such as precautionary saving spikes reducing APC temporarily to below 0.8 in 2020, highlight outdated aspects of traditional models that overlook pandemic-driven behavioral changes and inequality amplification.^[14]^[45]^[46]

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[45]
Economic Impacts of COVID-19: Evidence from a New Public ...
Real-time estimates of marginal propensities to consume provided better forecasts of the impacts of subsequent rounds of stimulus payments than historical ...