Marginal Propensity to Consume
➦ Marginal Propensity to Consume (MPC) is the extra amount that people consume when they receive an extra amount of disposable income (Income after paying tax).
➦ The short-run production function is stable as it is very difficult to change in the short period of psychological and institutional factors affecting the propensity to consume of the people.
Measures to Increase Marginal Propensity to Consume
➦ However, in the long, raising the propensity to consume is possible by the following measures:
1) Income Redistribution
➦ Income Redistribution helps to increase MPC. The government should redistribute national income in favor of the poor people by imposing progressive taxes on the rich and providing subsidies to poor people.
➦ When income redistribution takes place poor people also become able to consume goods and services.
➦ Income redistribution involves transferring wealth from higher-income individuals or entities to lower-income ones.
➦ This can be achieved through progressive taxation, social welfare programs, or other policies.
Points:
➨ By providing financial assistance to lower-income individuals, it directly increases their disposable income and thus their MPC.
➨ It can reduce income inequality, leading to a more equitable distribution of resources and potentially stimulating consumption among a broader segment of the population.
2) Wage Policy
➦ Wage Policy helps to increase MPC. In the long run transfer of income from a nonwage group through progressive taxation, and subsidies are affected by the help of the new wage policy.
➦ This type of wage policy will increase the consumption expenditure of wage earners.
➦ Wage policy refers to government or industry actions that influence wages, such as setting minimum wage levels or collective bargaining agreements.
Points:
➨ Increasing the minimum wage can boost the income of low-wage workers, raising their MPC as they have more money to spend.
➨ Collective bargaining can lead to higher wages and better working conditions, further increasing disposable income and, consequently, consumption.
3) Social Security
➦ Social Security helps to increase MPC. Some of the social security measures like unemployment compensation, old-age pension, health, insurance, etc. help to raise and stabilize consumption function.
➦ According to Kurihara, a social security program is regarded as a solution to the “paradox of thrift(people try to save money during an economic recession, which leads to falling in economic growth)” common to all wealthy capitalist economies.
➦ Social security programs provide financial support to retirees, disabled individuals, and others in need. This can include pensions, unemployment benefits, and healthcare.
Points:
➨ Social security programs provide a safety net, reducing the fear of economic hardship and encouraging people to spend rather than save excessively.
➨ Retirees with secure pensions tend to have higher MPCs since they rely less on saving for future needs.
4) Credit Facilities
➦ Producers should provide easy and cheap credit facilities for the purchase of consumer durables like motorbikes, TVs, refrigerators, etc. which will lead to an increase in the marginal propensity to consume the people.
➦ Access to credit facilities, like loans and credit cards, can encourage spending as people can borrow money to make purchases.
Points:
➨ Easier access to credit can lead to increased consumption, as people can buy goods and services even when their current income is low.
➨ However, it’s important to manage this carefully to prevent excessive debt and financial instability.
5) Urbanization and Colonization
➦ Urbanization and Colonization also help in increasing MPC.
➦ The propensity to consume of the people living in cities and newly developed colonies is higher than that of the village people.
➦ Encouraging urbanization and colonization involves incentivizing people to move to cities or underdeveloped areas to increase economic activity and job opportunities.
Points:
➨ Urbanization often leads to higher-paying jobs and better access to goods and services, which can increase disposable income and consumption.
➨ Colonization of new territories can open up resources and markets, stimulating economic growth and consumption.
6) Advertisement and publicity
➦ Advertisements and publicity help in increasing MPC. The proper program of publicity through advertisement helps in bringing notice to the consumers about the product and services.
➦ Advertisement and publicity campaigns are designed to influence consumer behavior and create demand for products and services.
Points:
➨ Effective advertising can create consumer desire and stimulate consumption by highlighting the benefits of products or services.
➨ Publicity efforts can generate interest and excitement around new products, encouraging people to buy.
7) Interpersonal Comparison
➦ Interpersonal Comparison helps to increase MPC.
➦ Interpersonal Comparison of the living standards of the people living in different regions of the same country as those of living in different countries creates new requirements and thus increases expenditure in the new consumption item.
➦ Interpersonal comparison involves individuals comparing their lifestyles and consumption patterns with others, which can lead to emulation and increased consumption.
Points:
➨ People often strive to “keep up with the Joneses,” spending more when they perceive others as having a higher standard of living.
➨ Social pressure and the desire for social status can drive individuals to increase their spending, raising their MPC.
Conclusion;
➦ Each of these measures can have a significant impact on increasing the Marginal Propensity to Consume, ultimately contributing to economic growth and stability.
➦ However, it’s important to implement these measures judiciously and consider their potential side effects to ensure sustainable economic development.
References
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S, S. (2014, February 6). 7 Measures to increase consumption spending. Your Article Library. https://www.yourarticlelibrary.com/economics/7-measures-to-increase-consumption-spending/24968#google_vignette
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I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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