Consumption (C) — Edexcel A-Level Economics A
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Consumption (C) explained
Households divide disposable income between consumption (C) and saving (S).
Read the full explanation
The relationship is captured by the identity Yd = C + S, so any change in one, given income, changes the other. The marginal propensity to consume (mpc) is the fraction of each extra pound of income spent, and the marginal propensity to save (mps) is the fraction saved; mpc + mps = 1. The average propensity to consume (apc) is C ÷ Yd and the average propensity to save (aps) is S ÷ Yd, with apc + aps = 1. A rise in income normally raises both C and S in absolute terms, but the proportions shift. Saving is a withdrawal from the circular flow, while consumption is domestic spending that circulates within it. For example, if income rises by £100 and consumption rises by £80, mpc = 0.8 and mps = 0.2.
Your focus
- State and apply the identity Yd = C + S to show how saving and consumption are related.
- Calculate mpc, mps, apc and aps from given income, consumption and saving figures.
- Explain why saving is a withdrawal and consumption is domestic spending within the circular flow.
Consumption (C) exam tips
Marking Points
- States the identity Yd = C + S and explains that, with income fixed, a decision to save more means consuming less.
- Defines mpc as the change in consumption divided by the change in income and mps as the change in saving divided by the change in income.
- Applies mpc + mps = 1, for example mpc = 0.8 implies mps = 0.2.
- Distinguishes average propensities (apc = C ÷ Yd, aps = S ÷ Yd) from marginal propensities.
- Explains that saving is a withdrawal from the circular flow, whereas consumption is induced domestic spending within it.
Examiner Tips
- 💡Write the identity Yd = C + S before working through any numerical example so the link is explicit.
- 💡Check that mpc and mps sum to 1; if they do not, re-read the figures.
- 💡Remember that consumption is not an injection; it is the domestic spending that keeps money circulating.
Common Mistakes
- Treating saving and consumption as unrelated: the correction is that they are two uses of the same disposable income, linked by Yd = C + S.
- Confusing marginal and average propensities: the correction is that marginal propensities use changes in income, while average propensities use total income.
- Assuming higher income always means a higher proportion consumed: the correction is that absolute consumption may rise while the average propensity to consume falls.
- Incorrectly labelling consumption as an injection: the correction is that injections are investment, government spending and exports, whereas consumption is domestic spending within the circular flow.