Measures to Increase Marginal Propensity to Consume | Macroeconomics

Measures to Increase Marginal Propensity to Consume
Introductory Macroeconomics | Economics | BBA | BBA-BI | BBA-TT | BCIS |
Management Notes

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.

However, in long, raising propensity to consume is possible by the following measures:

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.

Wage Policy:

Wage Policy helps to increase MPC. In the long run transfer of income from a nonwage group through progressive taxation, subsidies are affected with the help of new wage policy. This type of wage policy will increase the consumption expenditure of wage earners.

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.

Credit Facilities:

Producers should provide easy and cheap credit facilities for the purchase of consumer durables like motorbike, T.V, refrigerators, etc which will lead to an increase in the marginal propensity to consume the people.

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.

Advertisement and publicity:

Advertisement 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.

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 create new requirements and thus increase expenditure in the new consumption item.

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