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The consumption function
Introduction :-
On the basis of the study we simply define the consumption function that it is a relationship between consumption and income . It is expressed as : C= f(Y)
where C is a consumption and Y is a income.
Here C is dependent and Y is the independent variable.
this relationship is based on the assumption of "other things being equal or remains same".This relation implies that consumption depends on income.
The Aggregate Consumption Function :-By adding up the consumption functions of all households we arrive at the aggregate consumption function.it shows how the total desired consumption spending of all households varies with national income.it shows the behavior of the different individuals.
2. OBJECTIVE FACTORS:The objective factors are the external to the economic system. They may, therefore, undergo rapid changes and may cause marked shifts in the consumption function.
Introduction :-
Consumption function represents the functional relationship between total consumption and gross national income .It was introduced by the british economist John Maynard Keynes,in 1936.
On the behalf of it's importance and its subjective and objective determinants, it is a same as Keynes's psychological law of consumption.
On the behalf of it's importance and its subjective and objective determinants, it is a same as Keynes's psychological law of consumption.
MEANING OF CONSUMPTION FUNCTION :-
On the basis of the study we simply define the consumption function that it is a relationship between consumption and income . It is expressed as : C= f(Y)
where C is a consumption and Y is a income.
Here C is dependent and Y is the independent variable.
this relationship is based on the assumption of "other things being equal or remains same".This relation implies that consumption depends on income.
Consumption function is an increasing function of income ,i.e., consumption expenditure increases with the increase in income.
when the income is zero during the depression, people spend out of their past savings on consumption because they must eat in order to live.
So here we can say that the some part of the consumption is independent from the income.That consumption called autonomous consumption.
when the income is zero during the depression, people spend out of their past savings on consumption because they must eat in order to live.
So here we can say that the some part of the consumption is independent from the income.That consumption called autonomous consumption.
Its simplest form is the linear consumption function used frequently in simple keynesian model.
C= a + b×Y(d)
where "a" is autonomous consumption that is independent of disposable income.
The perimeter "b" is known as marginal propensity to consume(MPC) And Y(d) is a current disposable income.
The term b×Y(d) is the induced consumption that is influenced by the level of income.
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| Income and Consumption |
In the diagram at x-axis we have taken income and y-axis we have taken consumption. 45° line is the unity line where at all levels of income and consumption are equal to each other.
Its upward slope to the right indicates that consumption is an increasing function of income. Ð’ is the break-even point where C=Y. When income rises to 0Y1 consumption also increases to 0C2, but the increase in consumption is less than the increase in income, C1C2< Y1Y2 The portion of income not consumed is saved as shown by the vertical distance between 45° line and С curve.
Its upward slope to the right indicates that consumption is an increasing function of income. Ð’ is the break-even point where C=Y. When income rises to 0Y1 consumption also increases to 0C2, but the increase in consumption is less than the increase in income, C1C2< Y1Y2 The portion of income not consumed is saved as shown by the vertical distance between 45° line and С curve.
Characteristics of Consumption Function:
A study of the short run consumption function reveals the following four characteristics:
1) There is a break-even level of income. It is the level of income at which households spend all of their income on consumption goods, neither more nor less, i.e., at which saving is zero.
2. Below the critical (break-even) level people plan to spend in excess of their current income.
This can be done through the:
Either by borrowing or By dis-saving,
3. Once income crosses the break-even level, people plan to consume only a portion of their income and to save the remaining portion of it.
4. If income increases (decreases), consumption spending will also increase (decrease) though not proportionately.
PROPERTIES OF CONSUMPTION FUNCTION
The consumption function has two properties:
1) The average propensity to consume (APC)
2) The marginal propensity to consume(MPC)
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| APC and MPC |
(1)THE AVERAGE PROPENSITY TO CONSUME :-
the average propensity to consume (APC) is the fraction of income spent. It is computed by dividing consumption by income, or APC= C/Y
It is expressed as the percentage or proportion of income consumed.
It is expressed as the percentage or proportion of income consumed.
Sometimes, disposable income is used as the denominator instead, so APC =C/Y-T', where C is the amount spent, Y is pre-tax income, and T is taxes.
(2)THE MARGINAL PROPENSITY TO CONSUME :-
Marginal propensity to consume (MPC) is the extra consumer spending arising from an increase in national income.it is may be de- fined as the ratio of the change in consumption to the change in income.
MPC — ∆C/∆Y.
MPC — ∆C/∆Y.
MAJOR FACTS OF CONSUMPTION FUNCTION :-
Induced consumption :-consumption depends on income and varies with income changes it is called induced consumption.In Keynes’ theory of income determination variations in consumption are explained by changes in national income.
The Aggregate Consumption Function :-By adding up the consumption functions of all households we arrive at the aggregate consumption function.it shows how the total desired consumption spending of all households varies with national income.it shows the behavior of the different individuals.
DETERMINANTS OF CONSUMPTION FUNCTION :-
Acc to Keynesian,there are two factors,that influences the consumption function.
1) Subjective factors
2) Objective factors
SUBJECTIVE FACTORS :- Subjective factors are internal factors to the economic system.These factors are the characteristics of the short run.That includes human nature, social practices and institutions and social arrangement.
(1) Individual Motives:
They are:
(i)To build reserves.
(ii) For precautionary motive amd anticipated future needs, i.e., old age, sickness, accidents, etc.;
(iii)Motive to enjoy an enlarged future income by way of interest and appreciation.
(iv) Motive to improve the standard of living;
(v) Motive to enjoy a sense of independence and power to do things.
(vi) Motive to bequeath a fortune
(2) Business Motives:
Consumption and investment are influenced by the business motives. The behavior of All industries and carporations influences the economic system.
(i) Enterprise, who wants to do big things and to expand there business.
(ii) Cash, for overcome from the emergencies and difficulties successfully;
(iii) Income raise, to make large income and to show successful management.
(iv) Financial prudence, that provide adequate financial resources against depreciation and obsolescence, and debt redemption.
2. OBJECTIVE FACTORS:The objective factors are the external to the economic system. They may, therefore, undergo rapid changes and may cause marked shifts in the consumption function.
1.Wage Level:
if the wages increase then consumption also increases and vise versa.the workers will spend more (less) due increase (decrease)their income ,thats why consumption curve shifts upward (downward).
2.Gains or Losses:
Unexpected changes in the stock market leading to gains (losses) tend to shift the consumption function upward (downward).
3. Fiscal Policy:
Changes in fiscal policy in terms of taxation and public expenditure affect the consumption function. Heavy taxation will affects badly to the consumption and vise versa.
4. The Distribution of Income:
Distribution of income will also affects the consumption.Incorrect distribution of income will decreases the Consumption and vise versa.
5. Attitude toward Saving:
If an individual wants to more cash in hand or savings then consumption will decreases because of less spend on the commodity and vise versa.
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