What is Marginal Propensity to Save (MPS)?

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Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Marginal Propensity to Save (MPS) tells us how much of an extra rupee earned a person chooses to save. It's the fraction of any additional income that is put aside, rather than spent. MPS helps us understand saving habits when income changes.

Simple Example

Quick Example

Imagine you get a surprise bonus of ₹100 from your parents for doing well in exams. If you decide to save ₹30 out of that ₹100 and spend the rest, your MPS would be 0.3. This means for every extra rupee, you save 30 paise.

Worked Example

Step-by-Step

Let's say a family's income increases from ₹20,000 to ₹25,000 per month. Their savings also increase from ₹4,000 to ₹6,000 per month.

Step 1: Calculate the change in income (ΔY).
ΔY = New Income - Old Income = ₹25,000 - ₹20,000 = ₹5,000.

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Step 2: Calculate the change in savings (ΔS).
ΔS = New Savings - Old Savings = ₹6,000 - ₹4,000 = ₹2,000.

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Step 3: Apply the MPS formula.
MPS = ΔS / ΔY

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Step 4: Substitute the values.
MPS = ₹2,000 / ₹5,000

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Step 5: Calculate the MPS.
MPS = 0.4

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Answer: The Marginal Propensity to Save (MPS) for this family is 0.4.

Why It Matters

Understanding MPS is crucial for economists and policymakers who design government budgets and financial plans for our country. Financial advisors use it to guide people on saving for their future, whether it's for a new EV or higher education. It's also important for FinTech companies developing tools to help people manage their money.

Common Mistakes

MISTAKE: Confusing MPS with Average Propensity to Save (APS) | CORRECTION: MPS looks at the change in saving from a change in income, while APS looks at total saving out of total income.

MISTAKE: Calculating MPS using total income and total savings | CORRECTION: MPS always uses the *change* in income and the *change* in savings, not the total amounts.

MISTAKE: Assuming MPS can be greater than 1 | CORRECTION: MPS cannot be greater than 1 because you cannot save more than the extra income you receive. It must be between 0 and 1.

Practice Questions

Try It Yourself

QUESTION: If a person's income increases by ₹2,000 and their savings increase by ₹500, what is their MPS? | ANSWER: MPS = ₹500 / ₹2,000 = 0.25

QUESTION: A small business owner receives an unexpected order that increases their income by ₹10,000. If their MPS is 0.3, how much of this extra income will they save? | ANSWER: Change in Savings = MPS * Change in Income = 0.3 * ₹10,000 = ₹3,000

QUESTION: A household's income goes from ₹30,000 to ₹35,000. Initially, they saved ₹6,000. After the income increase, they save ₹7,500. Calculate their MPS and then find their Marginal Propensity to Consume (MPC). | ANSWER: Change in Income = ₹5,000. Change in Savings = ₹1,500. MPS = ₹1,500 / ₹5,000 = 0.3. MPC = 1 - MPS = 1 - 0.3 = 0.7

MCQ

Quick Quiz

Which of the following describes Marginal Propensity to Save (MPS)?

The total amount saved out of total income.

The proportion of an additional rupee of income that is saved.

The amount spent out of an additional rupee of income.

The ratio of total savings to total consumption.

The Correct Answer Is:

MPS specifically measures the fraction of *new* or *additional* income that a person chooses to save. Option A describes Average Propensity to Save, and Option C describes Marginal Propensity to Consume.

Real World Connection

In the Real World

In India, the Reserve Bank of India (RBI) and the Ministry of Finance often look at aggregate MPS data to understand household saving trends. This helps them make decisions about interest rates, which affect how much people save in banks or invest in schemes like Public Provident Fund (PPF). Financial apps like Groww or Zerodha also help individuals track their savings, indirectly reflecting their MPS.

Key Vocabulary

Key Terms

MARGINAL: referring to an additional unit or change | PROPENSITY: a natural tendency to behave in a particular way | INCOME: money received, especially on a regular basis, for work or through investments | SAVINGS: the portion of income not spent on current consumption

What's Next

What to Learn Next

Now that you understand MPS, you should explore Marginal Propensity to Consume (MPC). MPC tells you how much of an extra rupee is spent, and it's directly related to MPS, offering a complete picture of how people use their additional income. This will help you understand the concept of the 'Multiplier' in economics.