MPS Formula and How to Calculate MPS
Marginal Propensity to Save / MPS is the proportion of income saved when there is an increase in the consumer’s disposable income. Mps formula = ΔS / ΔY. This guide takes you through how to calculate MPS as a percentage for standardization.
An increase in disposable income depends on factors, like government taxes. The Marginal Propensity to Save produces a direct effect on the multiplier in the economy.
For standardization, MPS is not interested in how much one has saved. This is because the amount saved is directly dependent on increased disposable income.
MPS is calculated as a percentage. Thus, there is a standardization of percentages regardless of the amount saved.
What is MPS formula?
MPS Formula = ΔS / ΔY.
S = the change in savings
Y = the change in disposable income
Amount saved has a counter effect on the amount spent. If the consumer wants to save more of the increased disposable income, less is available for spending.
If the consumer decides to save only a few pennies, they will be left with much to spend. The counter effect between Marginal Propensity to Save and Marginal Propensity to Consume is because their total values must always add up to 1.
How To Calculate MPS?
Divide the change in savings (ΔS) by the change in disposable income (ΔY).
Mps formula = ΔS / ΔY.
MPS Example: Mark played a lottery and won $1,000. After the tax was deducted, he remained with $900. He decided to save $315 of the $900. The MPS for Mark is calculated as follows:
Amount Saved = $315
Disposable Income Y = $900
MPS = ΔS / ΔY
MPS = $315 / $900
MPS = 0.35 or 35%
The value for MPS (0.35 or 35%) produces a counter effect in Marginal Propensity to Consume (MPC) value. For the above case, the value for MPC is 1 – 0.35 or 100% – 35%. The value for MPC is thus 0.65 or 65 %. For additional disposable income earned, one has to option viable, spending or saving, or a combination of the two.
How to Interpret MPS?
MPS < 1
When the value for MPS is less than 1, the consumer saved the additional disposable income proportionately to spending. Only a given percentage of the money was saved, but the rest got back to circulation.
MPS = 1
When MPS is equal to 1, the consumer saved the entire amount of additional disposable income. Such saving is a withdrawal of money from circulation and is prompted differently among consumers.
What Affects Marginal Propensity to Save?
1. Money motives
A consumer with transaction money motives will spend most of their money. To such consumers, their transactions money motives will decrease their MPS.
Consumer cautious about their future earnings spends their money precautionary. They hold on to their money for precautionary motives. These precaution money motives will discourage spending and increase MPS.
A consumer with a speculative motive will hold on to money. Such consumers spend less of their disposable income to save as much as possible. Saving is with speculations of pursuing certain opportunities they are optimistic about. Thus, speculative motives of money results to a higher MPS.
2. Deflation and Inflation
During deflation, prices of goods and services generally reduce in the market. At a constant income level, the value of money increases as consumers can consume more and pay less. With the hope of a further decrease in prices, consumers hold on to money with speculative motives. The more people hold on money, the higher their MPS becomes.
During inflation, peoples start to feel the pinch of shooting prices of goods and services. People buy as soon as they get the money to avoid delays in purchases that results to paying higher prices in the future. Consumers use their disposable income for their transactions motives and spend most of it. The increased spending during inflation decreases MPS.
3. Government expenditure
Increased government expenditure through subsidies and incentives stimulates demand. This is because it results to lower prices of goods and services. Consumers will often maximize their spending to take advantage of the lower costs. In an attempt to take advantage of the lower prices, consumers save less, and consequently, the lower the MPS.
If the government reduces its expenditure, the costs of production go high. The high cost of production is extended to the prices of goods and services. As the prices of goods and services shoot, customers ration their expenditure. Consumers lower the amount spent on commodities from disposable income, saving this money and increasing MPS.
High taxes increase the prices of goods and services. With a constant disposable income, people must pay more for necessities. Even at constant consumption levels, the amount spends on consumption increases. Therefore, increased taxes hinder consumers’ ability to save, producing lower MPS.
Where taxes are low, prices of goods and services reduce. Consumers incur less on consumption in comparison to when the prices of commodities were high. They are left with more money to save and hence high MPS.
5. Level of Income
Low-income earners have less money to spend on many necessities. Their MPS is usually low because a saving option is less viable to them. To some, they live from hand to mount, and their MPS can be as low as 0.
Unlike low-income earners, high-income earners can save more money. After deducting expenditures, more money is left for them to save on speculative or precautionary motives. This is why high-income earner has high MPs.
What Happens to MPS When MPC Increases?
MPC and MPS are inversely related; when MPC increases, MPS decreases. When the MPC decreases, MPS increases.