Final answer:
The average propensity to consume (APC) is a measure of the percentage of disposable income that is spent on consumption. It can be calculated by dividing total consumption by total disposable income. As income rises, the APC generally decreases because people save more of their additional income.
Step-by-step explanation:
The average propensity to consume (APC) is the ratio of total consumption to total disposable income. To calculate it, you divide consumption by disposable income. The APC represents the percentage of income that a person or economy as a whole spends rather than saving. In mathematical terms, if the consumption function is divided by disposable income, it will show how consumption changes with changes in disposable income.
As disposable income increases, the APC typically decreases because while consumption increases, it does so at a smaller rate than income. For instance, if disposable income were to increase, people tend to save more, thereby reducing the APC. This behavior is reflective of the marginal propensity to save and the marginal propensity to consume (MPC), which in their sum equal to 1. The ratio of saving to disposable income is known as the savings rate, which complements the APC to total 1.
Here's an example: If the after-tax income is given and the MPC is 0.9, you can calculate the consumption by multiplying the after-tax income by 0.9. The fact that the MPC is less than 1 demonstrates that not all additional income is spent; some of it is saved.