Cunsumption Function

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Dr. Bhawna Bhatnagar Consumption Function

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Consumption Function

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Effective Demand

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Consumption Function

Keynes µ Psychological law of consumption¶

or µPropensity to consume¶ or simply

µConsumption Function¶ is a statement of very common tendency that when income

increases , consumption also increases

but not to the same extent as the increase

in income.

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In the words of Henson, µ The consumption

function shows what changes can be

expressed in consumption from given

changes in income.¶

It could be expressed as ±

C = f (Y)

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Characteristics of Propensity to

Consume

� Psychological concept

� income and employment depend uponpropensity to consume

� Unequal propensity to consume

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Kinds of consumption function or 

propensity to consume

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Marginal propensity to consume

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Propensity to save

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Factors affecting Consumption

Function

1. Instinct of miserliness

2. Change in real income

3. Change in the distribution of Income4. Change in Expectation

5. Wages

6. Rate of Interest

7. Liquidity Preference

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Cont..

8. Social Security and life insurance

9. Credit Facilities

10. Discovery of new product11. Changes in taste and fashion

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Consumption function ± Absolute, relative,

permanent income and life cyclehypothesis.

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� The economists generally agree that the

household consumption is a function of household income.

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1. Absolute Income Hypothesis

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Main properties

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Cont..

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Explanation of the Graph

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The Ratchet effect in Consumption

behavior 

The effect arises due to households¶

resistance against the fall in consumption

following a decrease in household income

It is so because household get used to a

certain level of standard in the long run

and hence when the income falls, their 

consumption falls less than

proportionately.

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