Marginal Propensity to Save (MPS) Explained: 2025 Guide with Key Examples and Insights

Julia Kagan is a financial and consumer journalist and a former senior editor for personal finance at ZAMONA.

What Is Marginal Propensity to Save (MPS)?

In contemporary Keynesian economics, the Marginal Propensity to Save (MPS) represents the fraction of an increase in income that individuals choose to save instead of spending on goods and services. Simply put, MPS measures how much of each additional dollar earned is set aside as savings rather than consumed. It plays a crucial role in macroeconomic analysis and is computed by dividing the change in savings by the change in income:

MPS = Change in Savings ÷ Change in Income

Graphically, MPS can be illustrated with a savings line, where the vertical axis represents changes in savings and the horizontal axis reflects changes in income.

Key Highlights

• MPS quantifies the portion of extra income saved rather than spent.
• It tends to increase with higher income levels, as wealthier individuals generally save a greater share.
• MPS is essential for calculating the Keynesian multiplier, which estimates the broader economic impact of increased investment or government expenditure.

Example of Marginal Propensity to Save (MPS) in Action

Imagine receiving a $500 bonus with your paycheck. If you spend $400 on a new business suit and save the remaining $100, your MPS is 0.2. This is calculated by dividing the $100 you saved by the $500 increase in income.

Why Understanding MPS Matters

By analyzing data on household incomes and savings, economists can estimate MPS across different income brackets. Since MPS varies with income, higher earners typically save a larger fraction of additional income because their basic needs are already met, reducing the incentive to spend extra earnings immediately. However, changes in income can also lead to shifts in consumption and saving habits.

Higher salaries enable households to cover expenses more comfortably and offer opportunities to save more. At the same time, increased income may lead to spending on luxury items or relocating to more expensive homes.

Knowing the MPS helps economists predict how changes in government spending or investments impact overall savings and economic activity. The expenditure multiplier, calculated as 1/MPS, shows how variations in MPS affect economic growth. A lower MPS results in a larger multiplier, meaning government spending or investments have a more significant economic influence.

Important Note

The Marginal Propensity to Consume (MPC) complements MPS, and together they always sum to one.

Marginal Propensity to Consume (MPC) Explained

MPC reflects the portion of additional income that is spent rather than saved. It is calculated as:

MPC = Change in Spending ÷ Change in Income

Using the previous example, spending $400 out of a $500 bonus means the MPC is 0.8. The sum of MPC and MPS will always equal one, making MPC the counterpart to MPS.

Summary: What MPS and MPC Represent

Marginal Propensity to Save (MPS): The fraction of income increases that individuals save.
Marginal Propensity to Consume (MPC): The fraction of income increases that individuals spend.
Both are vital for understanding consumer behavior and economic policy impacts.

Why Is MPS Important for Economics in 2024?

Understanding MPS helps policymakers and economists forecast how changes in fiscal policies, such as government spending or investment, will influence overall savings and economic growth. This knowledge is essential for crafting strategies that stimulate or stabilize economies effectively.

Final Thoughts

The Marginal Propensity to Save remains a foundational economic concept, reflecting how different income levels affect saving behavior. By analyzing MPS, economists can better predict the ripple effects of income changes on the broader economy, making it a crucial tool for modern economic planning and analysis.

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