Question

if APS in an economy is 0.6, what will be the value of APC?

Answer 1

Hint: First we will understand the two terms given in the question which are APS and APC where APS stands for Average propensity to save and APC stands for Average propensity to consume. Use the formula of APS given as the ratio of savings (S) to the total disposable income (Y) and that of APC given as the ratio of total consumption (C) to the total disposable income (Y), equate APS + APC = 1 to calculate the value of APC.

Complete step-by-step solution:
Here we have been provided with the APS of an economy equal to 0.6 and we are asked to calculate the value of APC. First we need to understand these terms and know the relation between them.
(1) APS stands for Average propensity to save and it is the ratio of savings (S) to the total disposable income (Y). It is also known as the savings ratio, given by the formula APS = $\dfrac{S}{Y}$.
(2) APC stands for Average propensity to consume and it is the ratio of total consumption expenditure (S) to the total disposable income (Y), given by the formula APC = $\dfrac{C}{Y}$.
Now, the sum of APS and APC of an economy is always 1, so we have the relation APS + APC = 1, substituting the given value of APS = 0.6 in the formula we get,
$\Rightarrow $ 0.6 + APC = 1
$\Rightarrow $ APC = 1 – 0.6
$\therefore $ APC = 0.4
Hence, the APC of the economy is 0.4.

Note: Note that the above two terms are important terms of Macro – economics, however they can be used in topics of mathematics like statistics and profit and loss, so you need to know the basic definitions. APC can never be 0 because $C={{C}_{a}}+c$ where ${{C}_{a}}$ is called the autonomous consumption which is always positive. Here c is the Marginal propensity to consume (MPC).