Consumption expenditure and saving:

For households  the personal disposable income (that is, income  after  payment of  taxes and adding  transfer payments)  is allocated on either consumption expenditure (C or saving (S). Thus we have C + S = Y .  

Average and Marginal Propensity to Consume:

Consumption expenditure is the major head of spending  by households and depends upon personal disposable  income. It is generally observed  that  for a  household the  level of  consumption increases as  income level increases. However,  there  is a minimum level of consumption required  for  survival. Thus,  in order to  survive, a household has  to spend a minimum amount on consumption even if  its  income  level  is  zero. The household may borrow for consumption expenditure or may draw upon past saving. Secondly. poorer households spend  less on  consumption  than richer households do. But as a percentage of household income,  it is observed that poorer households spend a higher percentage of  their income on consumption.

We  introduce  two conczpts: average propensity to consume (APC) and marginal propensity  to consume (MPC). APC is  defined  as  the  ratio of consumption expenditure to income  (C/Y).