What Is Average Propensity To Consume?

Average Propensity To Consume Explained in Less Than 5 Minutes

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The average propensity to consume (APC) is a ratio that measures the portion of a household’s income that’s spent on goods and services rather than being saved.

Knowing the average propensity to consume is helpful for economists who monitor national spending patterns and behaviors. It can also be beneficial information for people who want to have a better understanding of where their money is going.  

Find out more about the average propensity to consume, its importance to a healthy economy, and what impact it can have on your savings.

Definition of Average Propensity To Consume

The average propensity to consume (APC) measures what percentage of after-tax or disposable income a household uses to buy goods and services. This amount is the ratio of the total money spent over any given period of time to the disposable income earned during that time. 

Calculating the average propensity to consume is relatively straightforward:

Average Propensity to Consume equation

Economists track the average propensity to consume as part of assessing the spending and saving habits of an entire country. However, individuals can also perform their own calculations to see what percentage of their income they spend rather than save. If your average propensity to consume is high, you may find yourself without much money left over after each paycheck—which means you might have trouble saving money toward your financial goals.

  • Acronym: APC

Some economists exclude housing-related expenses like rent and mortgage payments when calculating APC, while others include these costs. If you’re calculating your household’s APC, including the cost of housing may help you get the most accurate picture of how much money you spend.

How Average Propensity To Consume Works

Income can be either spent or saved. Every time you get paid, you have to decide how much of your income you’ll save and how much you’ll spend. There are lots of ways to set up your household budget to help you make these decisions. But to calculate your APC, you simply add up all your spending and divide it by your disposable income.

When calculating your household APC, remember to include any debt repayments in the “spend” category.

The average propensity to consume varies based on income levels. Households or individuals with higher incomes tend to have lower APCs, while households that earn less disposable income typically use a larger share to pay for essentials like food, housing, utilities and transportation.

For example, imagine two households both have yearly consumption of $40,000. Family A earns a disposable income of $46,000 per year, while Family B earns $82,000 per year in disposable income. When you calculate the average propensity to consume for both households, Family A’s APC equals 0.869 ($40,000/$46,000). That means family A spends nearly 87% of their disposable income, and their high APC leaves them only about 13% to save. However, Family B’s APC equals 0.487 ($40,000/$82,000), which means they spend less than 49% of their disposable income each year. 

There are two ways that you can decrease your APC. One is to increase your income while not increasing your spending, and the other is to find ways to decrease your spending. Either option will mean you spend a smaller percentage of your income, allowing you to dedicate more money toward your savings.

Average Propensity To Consume vs. Average Propensity To Save

The opposite of the average propensity to consume is the average propensity to save. The two work hand-in-hand—if you’re doing more of one, you’re doing less of the other. The average propensity to save (APS) is the ratio of savings to disposable income. To calculate your average propensity to save:

Average Propensity to Save equation

The average propensity to consume and the average propensity to save always have a sum equal to one. The portion of your disposable income you spend and the portion you save add up to your total income.

Tracking the average propensity to consume on the national level is one way economists assess the economy's overall health.

What Average Propensity To Consume Means for You

When consumers spend money, it stimulates the economy. More demand for goods and services means sales increase, businesses make money, and more workers can be employed. The opposite is also true. When the national APC decreases, it means consumers are spending less—which could harm the economy due to businesses losing profits, closing down, and therefore employing fewer workers.

But considering your household’s APC is much simpler: the more disposable income you spend, the higher your APC. Conversely, the more income you put into savings, the lower your APC. It’s important to have a good understanding of your financial goals to make the best money decisions for yourself and your family. The key is to strike the right balance between your spending needs and your savings goals. 

Key Takeaways

  • Income is either spent or saved. The portion of after-tax income that is spent is the average propensity to consume.
  • An increase in the average propensity to consume means a decrease in the average propensity to save.
  • The average propensity to consume is a measure mainly used by economists, but people can also apply it to their own household income and spending.