idea is that the income fluctuates during lifetime and savings make it possible to maintain consumption at the required level even in years when income has decreased. The equation for consumption then looks as where W stands for wealth, MPCW and MPCY denote marginal propensities to consume of wealth and income, respectively. Thus average propensity to consume is equal to APC may fluctuate for the short term but for the long term it is constant as the structure of society is stable in the long term. Permanent income hypothesis Permanent income hypothesis is Milton Friedman´s theory. Friedman´s consumption function is given as where Yp denotes permanent income. Average propensity to consume is then: According to this hypothesis, there are only changes within transitory income (Y=Yp+Yt) in the short run, the consumption does not react to those changes and people with lower income have higher APC as they spent higher proportion of their income on consumption. In the long run on the other hand, changes in income are reflected in permanent income and APC becomes constant. See also Marginal propensity to save Marginal propensity to consume Average propensity to save References Financial ratios Gross domestic product